Monday, March 24, 2014
Stocks appear on track to continue last week’s positive momentum, shrugging today negative data out of China and Europe about those region’s factory sectors.
The market bounced around after Wednesday’s Fed announcement, but ended the week higher and remains less than 2% below a key milestone level. The market’s turnaround following the Wednesday sell-off reflected the realization that an improved growth outlook for the U.S. economy was more than enough to offset the Fed’s perceived hawkish tilt.
We don’t have much data on the home front today, though the PMI data this morning out of Europe and China is broadly negative. China’s manufacturing sector continued to lose ground in March and remained in ‘contraction’ territory for the third month in a row. The preliminary PMI reading for March came in at a lower than expected 48.1, below February’s 48.5 level. The PMI’s sub-components about employment, new orders and production were all down in March, though exports rose after falling in February.
The recent run of soft Chinese reports is prompting many analysts to lower their estimates for first quarter GDP growth, with many seeing the growth pace barely above +7%. The country’s economy expanded at +7.7% growth pace in the fourth quarter as well as full year 2014, but odds remains high that growth will come below the government’s +7.5% target this year. Given China's central status as the consumer of commodities and other basic materials, these signs of slowdown are a net drag for those sectors.
With respect to U.S. data, we have housing, Durable Goods and Personal Income & Spending data coming out his week, but all of it pertains to February when weather was still a disrupting factor. Given broadly favorable view of the U.S. economy, the markets will most likely discount any negativity coming out of these reports. The expectation is that the tone of U.S. economic data will improve as the weather effects start dissipating. We should start seeing such undistorted data from April onwards.
Don’t be surprised if the S&P 500 moves towards the 1900 level in the meantime. But it’s ability to sustain that level will depend on how economic and earnings data turns up in the coming days. The 2014 Q1 earnings season gets into the spotlight by the middle of April. We will likely hear a lot about this year’s harsh winter on the Q1 earnings calls, but investors will be keeping a close eye on what management teams are saying about Q2 and the second half of the year.
Director of Research