Month: July 2014

While last week was heavy on corporate earnings, the release of economic data will be the focus over the coming days. Second quarter GDP will be announced on Wednesday along with the results of this week’s Federal Open Market Committee meeting. The Fed is nearing the end of its taper process and this will be the second to last meeting before its scheduled October exit. There’s unlikely to be any surprising or drastic changes as data has been relatively consistent.

Earnings will remain important, but we have passed through the halfway point in terms of the major reports. There are still a number of blue chips reporting, but down from the influx we saw over the past few days. Proctor & Gamble (PG) and Exxon (XOM) will be two companies to pay attention to.

Overseas, Chinese stocks rallied sharply as investors have quickly become more optimistic over government stimulus efforts. GDP growth rates increased from the first to second for many provinces, while buying restrictions have started to ease. Industrial metals and mining shares have also rallied on expectations of stronger Chinese growth. Whether sustainable growth materializes is another issue: the second quarter growth rate was boosted in part by having local governments move their development projects forward, spending all of their annual investment budgets in some cases. Nevertheless, because China is a large component of many emerging market funds, this will provide a positive start to the week for those shareholders.

Year-to-date, the S&P 500 Index remains the top performing index, up 7.03 percent. It is closely followed by the Nasdaq, which has gained 6.54 percent. The past few weeks have been strong for technology stocks and that has made the Nasdaq the best performing index over the past 4 weeks and 3 months. The Dow Jones Industrial Average is up a decent 2.32 percent, and the MSCI EAFE follows closely behind, up 2.31 percent. The Russell 2000 remained the outlier, down 1.63 percent this year.

Economic Reports: This will be a big week for economic data. GDP comes out on Wednesday and analysts are looking for 3.2 percent growth. There is quite a range of estimates though, ranging from about 2.6 percent to 3.5 percent. Solid growth around 3 percent is still expected, but some economists trimmed their forecasts. The market is already looking towards stronger growth during the second half and an upside surprise would reinforce the positive outlook.

Domestic auto sales and July unemployment will also be released on Friday. The PMI numbers for several countries will also be reported.

With earnings season underway, it looked to be a positive week for the markets, until the sell-off Friday. The Dow Jones Industrial Average fell below 17,000, losing 123.23 points on the day. The S&P 500 and Nasdaq also lost ground, giving up 0.48 percent and 0.50 percent, respectively. For the week, the S&P 500 was flat, while the DJIA lost 0.90 percent. The Nasdaq, however, moved higher for a second week, gaining 0.40 percent.

Apple (AAPL), a staple in technology funds, beat estimates by a solid margin and is pushing the stock price towards the psychologically important $100 level. That is also the 7:1 pre-split high for Apple, so a push through into the low $100s would be very bullish.

Facebook (FB) was another technology firm that provided sound results, which the company’s earnings more than doubling from the prior year. Earnings were 42 cents per shares, well ahead of estimates of 32 cents per share. The stock jumped 5 percent and provides a big lift to the social media sector. Only last week, the sector took a hit from the Federal Reserve report that said valuations were “stretched” in the sector. Whether you agree with the Fed, Facebook’s strong results this week show how quickly those valuations can be brought down.

The big disappointment came from Amazon (AMZN), a firm invests very heavily in technology infrastructure and operates on razor thin margins. In the prior quarter, the firm lost more than $100 million, despite nearly $20 billion in revenue. Shares slumped 10 percent in the wake of the report.

Even though Amazon’s report was weak, the general trend for the sector is very positive. Both Intel (INTC) and Microsoft (MSFT) have seen their share prices rally strongly on good earnings (in the case of Intel) and a reorganization plan (from Microsoft). These two giants remain important components in many technology funds and they are breaking out of decade long basing patterns. If this trend in tech shares continues, the Nasdaq could exceed its old high at some point in the next 12 months.

Non-tech blue chips delivered respectable results as well, including Ford Motor (F) and Starbucks (SBUX). Caterpillar (CAT) in particular, disappointed. Even though earnings beat expectations, revenues were lower than expected. This implies the slower growth in China remains an issue, as Caterpillar benefits from strong natural resource demand. China managed to increase growth in Q2 with targeted stimulus measures, but these have few long-term effects and the continued real estate slowdown is keeping a lid on resource demand.

The good news is earnings report this week lifted the S&P 500 to a new all-time high. The DJIA, before Friday, was on the verge of a new high. The sell-off today should not overly concern investors. Finally, as has been the case for much of the year, small caps remain the weak spot. There is reason for optimism with short-term technical indicators turning up, which could lead to another period of outperformance.

A number of strong earnings reports last week were derailed by geopolitical events and comments made by the Federal Reserve. The impact should be temporary and we should start seeing investors focus back on earnings of a number of blue chip stocks. Apple (AAPL), Coca-Cola (KO), Netflix (NFLX) and Ford (F) are just a few household names that will be reporting.

In Europe, weak economic data out early on Monday could keep pressure on the euro. That is relatively good news for U.S. assets, which will have an easier time outperforming if the euro is weak. Overnight, Germany reported low producer price inflation and Italy announced industrial orders were much lower than expected. The European Central Bank still hasn’t launched a quantitative easing policy, although it still remains a possibility.

Two areas that spiked due to geopolitical events last week were gold and oil. Both were already having good years and the bounce interrupted recent sell-offs. We’ll see this week whether they can hold those gains. This week we’ll also see if small-caps and momentum sectors can rebound from the Fed’s comments about “stretched valuations.” Small-caps were strong on Friday, indicating investors believe there is still value to be had.

The S&P 500 and Dow Jones Industrial Averages are close to their all-time highs and both could break those records this week. The Russell 2000 will likely need two or three positive weeks to get back to a 52-week high.

Economic Reports: This will be a relatively light week for economic data ahead of next week’s second quarter GDP report.  The flash PMIs for various nations, including the United States and China, will be closely watched.

Earnings:  This is an important week for earnings. Among the major names reporting are Netflix (NFLX), Apple (AAPL), Texas Instruments (TXN), Coca-Cola (KO), Microsoft (MSFT), Altria (MO), McDonald’s (MCD), Lockheed Martin (LMT), Harley-Davidson (HDI), Boeing (BA), Facebook (FB), Delta Air Lines (DAL), AT&T (T), Freeport McMoRan (FCX), Pepsi (PEP), Gilead (GILD), Ford (F), General Motors (GM), Amazon (AMZN), Celgene (CELG), Caterpillar (CAT), Eli Lilly (LLY), 3M (MMM), Starbucks (SBUX), Baidu (BIDU) and Visa (V)