Yellen’s Patience Is Market’s Gain

We started today’s session essentially flat with another day of Janet Yellen testimony dominating the headlines. The Fed chairwoman performed quite a feat Tuesday in front of the Senate Banking Committee and will likely repeat that performance in the House.

The Fed Chairwoman was all praise for how good the economic picture was, which would ordinarily have been interpreted to mean the first rate increase is coming in June. But she was able to tie the start of the tightening cycle to developments on the inflation front, specifically for inflation readings to move towards the Fed’s 2% target.

We know that isn’t the case at present, with energy prices pushing ‘headline’ inflation readings in the opposite direction. She indicated that the Fed will be in no hurry to start raising rates, but would prefer to retain the flexibility to do just that should inflation readings start behaving differently. Investors liked what they heard, pushing stocks higher and bond yields lower.

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Weak energy prices seem to be helping the earnings picture for the Retail sector, which has been reporting quarterly results in recent days. This morning’s Target (TGT) report showed strong momentum on the same-store sales front, the same improvement we saw from Wal-Mart (WMT) last week. But as was the case with Wal-Mart, Target also provided a tepid outlook for the current period.

For the sector as a whole, with results from 66.7% of the retailers in the S&P 500 index out, total earnings are up +4.5% on +5.7% higher revenues, with 71% of retailers beating EPS estimates and 50% beating revenue estimates. These results are only marginally better than what we have been seeing from the sector in the recent past, but Retail sector stocks have been responding favorably to the Q4 results, more so than members of any other sector. The low energy prices have raised hopes, and as we saw with same-store sales numbers with Target and Wal-Mart, those hopes aren’t unfounded.

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