Week in Review
Following the stock market’s first correction since the Chinese growth scare two years ago, blue-chip stocks have rebounded furiously, producing the best week of returns since December of 2011. Investors spooked by the rapid descent of stock prices earlier this month are now scrambling to get back in. We have observed that a typical correction in stock prices involves a 13-percent drawdown and requires six months for full recovery. At the pace stocks have rebounded this past week, correction in the S&P 500 would be fully recouped in two weeks. The theme of global synchronized expansion remains alive and well, creating a positive backdrop for earnings that is more than offsetting concerns about rising inflation.
Puts and Takes
Two key economic reports released this week might have given less ebullient investors pause, but faster-than-expected core inflation numbers and disappointing retail sales numbers in the U.S. failed to cause much concern, at least among equity investors. The Commerce Department reported retail sales that fell sequentially for the first time since last August, with Christmas selling season gains revised lower. Nevertheless, year-over-year retail sales gains remain healthy and may have even given some solace to bond investors concerned about consumption spending growing too quickly. What caught the attention of bond investors was the consumer price report for January, which showed that inflation in the U.S. excluding volatile food and fuel costs rose at a faster-than-expected 0.35 percent sequential pace. In response to the inflation report, benchmark 10-year Treasuries sold off, pushing yields to four-year highs exceeding 2.9 percent. Nevertheless, headline inflation of 2.1 percent remained stable. Furthermore, we would observe that the Fed’s preferred measure of price gains, the personal consumption expenditures deflator, remains below the central bank’s 2.0 percent target. In contrast to fixed income investors, equity markets are welcoming a moderate amount of inflation as a by-product of faster economic growth and one that also provides a welcome lift to sales.
With regard to sales and earnings that companies are reporting for the fourth quarter, results have been outstanding. At the beginning of earnings season, investors were expecting bottom-line gains of 11 percent on mid-single-digit sales growth. With three-quarters of S&P 500 companies now having reported, over 70 percent have reported upside to both sales and earnings expectations. While the percentage of companies beating earnings estimates is in line with past reporting seasons, earnings quality is improving as a higher percentage are exceeding revenue expectations. From $146-per-share in S&P 500 earnings estimated at the beginning of 2018, investors now expect blue-chip companies to earn $156-per-share this year. Positive revisions reflect healthier company fundamentals and corporate tax cuts from the Tax Cuts and Jobs Act.
This week, investors were treated to “beat-and-raise” numbers from the likes of technology stalwart Cisco Systems, broadcaster CBS and beverage giant Coca-Cola. Cisco and Coke outperformed on the news, while CBS lagged on concerns the company could reunite with troubled network operator Viacom.
Takeaways for the Week
- Stocks have rebounded with a vengeance following last week’s correction
- A successful earnings season is coming to a close