Investors looking to stay in tune with the current environment must constantly be on the lookout for changes to the outlook for the economy, earnings growth, inflation, interest rates, etc. Cutting directly to the chase, recent economic data suggests that we may (the key word at this point in the game) be seeing a shift in the direction the winds are blowing.
Up until April 29th, the stock market had enjoyed a strong tailwind. The economy was improving and concerns about the recent "soft patch" were fading. Quarterly earnings continued to come in above expectations. The Fed remained committed to keeping ZIRP (zero interest rate policy) in place. Worries about Europe had all but evaporated as the EU/IMF plans seemed to be working. Inflation didn't appear to be much of a threat. The Chinese looked to walking the economic tightrope well. And even the jobs market in the U.S. appeared to be finding some modest momentum.
Since the beginning of May however, it looks like those tailwinds may be turning into headwinds. Exhibit A in our argument is that concerns about Europe are suddenly back in the headlines as worries about a replay of 2007-08's credit crisis are increasing. While market's don't usually get hit for the same reason twice, recall that it was hedge funds "blowing up" due to the dislocations in the credit markets that started the spiral downward a couple years ago. And given that transparency amongst the hedgies remains opaque at best, the worries about the impact of a sovereign debt default are on the rise.
Sticking with the Eurozone theme for a moment longer, Friday's news flow wasn't particularly positive. First there was Germany's Bundesbank report, which stated in no uncertain terms that it expects the country's economic growth to slow "for the foreseeable future." Then there was the report that Norway had decided to put the brakes on financial aid to Greece. Next up was Fitch's downgrade of Greece's long-term debt rating. And finally, the report showing that Germany's PPI came in double consensus expectations led some analysts to put inflation concerns back on the table.
Closer to home, a couple of earnings reports from retailers created some consternation for the macro crowd. Normally, we don't pay too much attention to individual company earnings as they don't usually have an effect on the overall market. However, word that cost increases at Gap (GPS) would impact earnings in the second half of the year put a dismal stamp on the earnings season for the retailers. Aeropostale suffered a similar fate on Friday as it too spoke of increasing costs and narrowing margins going forward, causing the teen retailer to cut its earnings expectations for the coming quarter.
Now toss in last week's economic data such as the LEI, the Philly Fed report, and the housing data, and it becomes clear that the winds just might be starting to shift. This does NOT mean that stocks will head lower from here. However, recent data might cause some investors to implement the old saw, "Sell in May and go away."
Turning to this morning... S&P's warning that it may soon downgrade Italy's credit rating in response to slowing economic growth, coupled with election results in Spain and Germany have European markets on the defensive this morning. As expected, U.S. markets have followed suit in the early going with futures pointing to a lower open.
On the Economic front... The Chicago Fed reported that their National Activity Index fell to a reading of -0.45 points in April from a reading of +0.32 in March. This was the first negative reading since December 2010 and the lowest level for the index since August 2010. This is yet another report suggesting that the economy has hit a speed bump.
Source: TopStockPortfolios.com
