Off to the Races

by Shawn Narancich, CFA
Executive Vice President of Research

 Ohhh, the Weather Outside Is Frightful

Rubber hit the road this week for investors as traders and money managers returned to work after what for many turned out to be a nice two week break. Stocks appear to be consolidating gains realized over Christmas and New Year’s, with a plurality of economic data pointing to faster U.S. growth in 2014. A fly in the ointment was this morning’s December employment report which showed the economy producing just 74,000 jobs - albeit in a month where bad weather seems to have had a disproportionately negative impact on the headline number. Nevertheless, if one excludes construction job losses and cases where people were counted as unemployed because they couldn’t get to work, the job numbers still fell short of estimates. And while the unemployment rate dropped to 6.7 percent, it fell primarily because more of the jobless gave up hunting for work. Indeed, as we look back to year-end, the labor force participation rate has fallen to a new cyclical low of 62.8 percent - that is the percentage of “employable” people either with a job or looking for work.

Gaining Momentum

Will one month of relatively poor employment data dissuade the Fed from its planned tapering of QE? We doubt it. Q4 retail sales picked up, the renaissance of U.S. manufacturing and energy is going full steam ahead, and capital spending by companies flush with cash appears on the verge of inflecting upward. In related fashion, this week’s monthly trade data was bullish. The November report showed U.S. imports exceeding exports by a four-year low of $34 billion. Increasingly positive trade flows are being driven by two key trends: rapidly falling oil imports resulting from new domestic production and surging exports of gasoline and diesel being refined from the crude. As a result of these encouraging trends, GDP growth estimates for the fourth quarter are being revised upward, and for the first time in recent memory, the U.S. economy may have grown in excess of 3 percent for two consecutive quarters. With fiscal headwinds waning, 2014 is shaping up to be a year of faster economic growth domestically.

The Dawn of Another Earnings Season

Alcoa unofficially kicked off the fourth quarter reporting season by reporting weaker than expected profits that left investors disappointed and shareholders with lighter pockets. Other early reports from seed and herbicide producer Monsanto, US beverage producer Constellation Brands and chipmaker Micron were more encouraging, and each of these cases resulted in nice stock price gains afterward. Overall, investors are expecting blue chip earnings growth of 6 percent for Q4, on flat revenues. These estimates could prove conservative if fourth quarter GDP growth was as strong as the 3 percent rate we expect. Next week, several big banks including JP Morgan and Citigroup will come to the earnings confessional, as well as industrial conglomerate General Electric. Let the fun begin!

Our Takeaways from the Week

  • Stocks are taking a breather, consolidating some of their heady 2013 gains
  • Despite a hiccup in the monthly employment report, the U.S. economy appears to be gaining steam