The market had a good week as the SPY was up 1.78%, VTI +1.64%, VT +1.89% and AGG -.15%. But it was the NASDAQ that really powered the market, the Qs (QQQ) was up 4.27% on the week helped by MSFT, AMZN and GOOG.
Economic data was not in sync with the positive market. The Chicago Fed National Activity Index missed by 1/2 point. the CFNAI measures overall economic activity. It was the worst reading since June of 2014 and the 3-month average of -.27 is now the worst since October of 2012.
Likewise, the durable goods report, ex-transportation, also was 1/2 point short of consensus.
400 companies reported earnings and 64% beat earnings estimates but only 42% beat the revenue number. Earnings guidance is running at about a -3.5% so far this quarter, but that is an improvement on last quarter.
None of the above seems to matter. In a world with zero or negative interest rates there is not much alternative. The SPY and the VTI are very close to all-time highs, the Qs are in new high territory as is VT.
Some of the former high flyers are back in business. AMZN closed the week up 18.5%. Since January 20th, AMXN is up 53.78% and has a forward p/e of about 100. Over the last two weeks NFLX is up 22.84% and is up 63.46% on the year. NFLX has a forward p/e of 125.
Barry Ritholtz, from The Big Picture, points out today on Bloomberg that Enterprise Value / EBITDA has the best track record of forecasting forward markets. Looking market wide EV/EBITDA shows that the market is about fairly valued so future gains should be about average, in the 8 to 10% area. This is in contrast to other ratio’s which show an overvalued market.
In regards to CAPE, the metric misses a couple of key points. ROE for technology companies are completely different than old line business. They simply do not require the investment that traditional old-line businesses did. Second, the cost of being an investor today is a fraction of what it used to be.
When we left off last week, the market was closed on Friday, April 3 for the Good Friday holiday, but employment numbers were released and it was a disaster. The futures took a big hit and it was expected that the market would have a tough Monday. Well I guess over the weekend it was decided that bad economic news is good stock market news, as it so often is (in the “market’s” view), and the market opened slightly down on Monday but then finished strong and was up for the day. Tuesday was a small decline and the rest of the week was up. In sum, it was a good week for the equity markets.
The SPY was up 1.74%, the VTI was up 1.61%, VT was up 2.00% and the AGG fell by 0.22%.
Earnings week kicked off and 24 companies reported. 20 of the 24 topped expectations. 36 SP500 companies report this week coming up. As a counterweight to the poor employment report described above, on Thursday, claims for first time unemployment benefits fell to 282,000. That is the lowest number since June 2000. GE added to the up move on Friday, announcing it will divest of most of its GE Capital finance unit over the next couple of years. Proceeds, expected to be about $90b, would be used for buybacks. GE was up 14% on the week.
The market was closed on Friday for the holiday and that kept the indexes in the black for the week. The SPY was up 0.34%, VTI +0.49%, VT +0.71% and AGG +0.41% (dividend adjusted). However, a weak payroll report came out Friday morning and that pushed the e-mini futures down 0.62% on the week. So the regular markets were essentially saved by the Good Friday holiday but will most likely start Monday lower.
Non-farm payrolls increased by only 126,000. That was almost half of the expected increase of 245,000. So it was a huge miss and payroll numbers were also revised down from the previous two months. The unemployment rate remained steady at 5.5%. Economic reports have been to the weaker side of late, but many consider this a result of an extremely cold winter and the impact of the port slowdown in California. Still, there now has to be some consideration that there is something to the poor numbers and the strong growth we saw to close 2014 was the aberration. The slower economy can be measured by the the 10-year treasury bond yield which has dropped to 1.81% from about 2.13% at the close of the year.
Earnings season begins this week and companies are running into three headwinds. First, the fall in energy prices will have a big impact on that sector and earnings will be hit, bringing down the overall market earnings. Second, the strong US dollar will negatively impact firms that do international business, that means much of the SP500. And third, the bad weather and the port slowdown in the United States will impact many domestic businesses. Overall earnings are expected to fall 3-4% this quarter. The SPY is only off 2.62% from its March 2 high of 211.99. So we have earnings going one way (down) and the market going the other way (up). That cannot go on forever. We will see if the economy can pick up from here.