Sell in May? Not on this Day
Defensive sectors like telecom, utilities, and healthcare don’t typically lead stocks to new bull market highs, but through the first four months of this year, that is exactly the odd circumstance investors have observed. A recent string of softer economic reports (both domestically and overseas), stubbornly low Treasury yields and weak trading volumes have fed investor skepticism about the underlying strength of a stock market that once again set a new high on the S&P 500 this week. Only time will tell if a late-week rally in cyclicals will reverse a trend of year-to-date underperformance, but count us as pleased to see a market led higher by elements signaling better economic health. In that regard, the Labor Department’s latest read on jobs was surprisingly upbeat, as net non-farm payrolls expanded at a faster rate in April. Net new job creation of 165,000 certainly isn’t a barn-burning number, but when combined with the upward revisions made to both February and March figures, the jobs picture all of a sudden doesn’t look so bad. Once again, the unemployment rate dropped, this time to 7.5 percent. Surprisingly weak construction spending and lower levels of manufacturing activity reported domestically and in China remind investors that a global economy facing European and U.S. fiscal austerity continues to encounter substantial headwinds.
Discretion the Better Part of Valor
While austerity remains official mantra in Europe, we have noticed a not-so-subtle shift in the Continent’s view of it. With Spain struggling to overcome 27 percent unemployment, key European leaders have agreed to relax the timetable for it to achieve the Eurozone’s holy grail of reducing deficits to a rate of 3 percent of GDP or less. Of course we have to question how long it will be before other economically depressed countries on the southern periphery ask for similar treatment and, if granted, whether the hard-fought reduction of borrowing costs in southern Europe could reverse course. One key player who remains unswayed by calls to relax austerity is ECB President Mario Draghi who, in announcing another rate cut this week, implored European countries to stick to their fiscal diets. Judging by the dramatic fall of interest rates in Spain, Italy and Portugal, the sovereign debt crisis has been extinguished, at least for now.
With about 80 percent of the S&P 500 having now reported first quarter earnings, about two-thirds of companies have delivered better than expected bottom line numbers and modest levels of EPS growth, while at the same time missing top line expectations in the majority of cases. In other words, a near repeat of what we saw at the end of 2012. The feel right now is late cycle, with companies that are offering updated financial guidance more often than not reducing their projections. A notable exception is the insurers. Aetna and Cigna both reported surprisingly good numbers and raised estimates for the year. A big question that continues to loom large is whether the HMOs will prosper under the expanded system of health insurance coverage mandated by the Affordable Care Act, which becomes law next year. Only time will tell whether the volume gains associated with additional insured lives will more than offset the potential margin headwinds of covering the previously uninsured.
Our Takeaways from the Week
- The sun is beginning to set on a partly cloudy earnings season
- Stocks continue to set new highs as global central banks remain committed to unprecedented levels of monetary stimulus