U.S. stocks were mixed Monday with the blue-chip indexes off 0.2% for the day and Nasdaq up 0.2%; the net result is that most major stock market averages are off by less than 1% from their recent highs. The exception is the S&P 600 SmallCap index, which is down 1.4% from its early-April high. There is this distinction between the action of the big-cap indexes and that of the small- and mid-cap stock averages: the latter’s recent highs were all-time highs, while the Dow and S&P 500 are still 10%-15% below their 2000 peaks, and the Nasdaq Composite is 44% below its high during the dot.com bubble. Today’s earnings reports did little to sustain the good feelings generated in last week’s markets by Intel and Apple; Kimberly-Clark’s in particular was disappointing as rising costs for raw materials (wood pulp) hurt profit margins. The company indicated that it will be raising product prices.
Adding to the slowdown indicated last Thursday by the Philly Fed survey, the Dallas Fed’s manufacturing activity index for April was reported today at 10.5, a bit below both the consensus estimate (13.7) and the prior month’s level (11.5). The new home sales report for March, on the other hand, was better than expected, with sales up 11% over an upward revised sales total in the prior month. Even with the revision, the February selling rate was the weakest on record, due in part to that month’s wicked weather. March’s improved level needs to be viewed within the context of the worst housing recession since the 1930s; sales are after all still running 21% below the year earlier rate and more than 50% below the average monthly rate since 1963 (see charts). The final week of April is a busy one for economic (and earnings) reports: consumer confidence, Case-Shiller home prices, durable goods orders, Q1 GDP and March personal income and spending.
This week is also FOMC meeting week, with the Fed policy group meeting Tuesday and Wednesday. There is a new twist to the Fed’s reporting process this month, with Fed Chairman Ben Bernanke conducting his first post-FOMC-meeting press conference. For this reason alone, it is unlikely that there will be any surprises emerging from the two-day Fed confab. And on the fundamentals, it is likely that the dovish view of the Bernanke-Dudley-Yellen triumvirate – that interest rates need to stay low because of high unemployment and current inflation pressures are seen as transitory – will continue to prevail. Treasury bond prices were modestly higher Monday, particularly in the 7-10 year maturity range. The dollar was flat today, and commodities prices were mixed, with gold and silver higher but crude oil and copper lower.
INVESTMENT OUTLOOK…Earnings disappointments of the sort that Kimberly-Clark produced Monday may become more commonplace as we approach a more mature phase of economic expansion, and the lowest level of market volatility since 2007 is sure to be interrupted from time to time this year. Nonetheless, in the aggregate U.S. companies are expected to generate positive sales and earnings results going forward. As a result, we expect stocks will produce better returns than bonds and bills over the coming 12-18 months, although we doubt that the first quarter’s rate of return to stocks can be sustained through the rest of 2011 – notwithstanding the Easter week’s strong market action.
Copyright © 2011 by Wright Investors’ Service, Inc.