While we expect the economic climate to be supportive for share prices, we cannot ignore the lingering risks of Spain’s current sovereign woes, China’s slowdown and its effect on emerging market economies.
Mark Luschini, chief investment strategist, Janney Montgomery Scott
May 2, 2012
The stock market is old enough to make its own choices, but sometimes one wonders if it might require a little adult supervision. The market’s interpretation of last week’s economic data is impressive. What might have put share prices in the dog house just six months ago is viewed today as positive, or at least innocuous. Uninspiring readings on consumer confidence, a poor durable goods report, news that the U.K. has officially entered a recession, and the weekly unemployment claims backing up might have throttled the markets. Friday’s report on first quarter growth that failed to match expectations could have been another culprit to weaken equity prices. Instead, the stock market put in a solid week, with the Dow Jones Industrial Average advancing 199 points, or 1.6%, to close at 13,228. How can that be? In a word…profits. Corporate earnings have been much better than expected, and investors are reacting to rising profits by pushing share prices higher. So far, earnings are ahead by 7% from last year when expectations were only about 1%. In addition, almost three-quarters of the companies reporting have boasted better-than-expected results, well above the historical trend of two-thirds. As earnings season begins to wind down, investors will refocus on the underlying fundamentals. While we expect the economic climate to be supportive for share prices, we cannot ignore the lingering risks of Spain’s current sovereign woes, China’s slowdown and its effect on emerging market economies, and the election battles soon to take place in France and Greece. We continue to find the equity market the most attractive asset class, but advocate large, quality companies as the resource for equity-based portfolio construction.