4 weeks ago (Tue 4/9, “Back to Reality – Earnings Season Kicks Off”), I was skeptical that markets could power through what looked to be an upcoming disappointing earnings season. I quoted E.S. Browning from the Wall Street Journal that 1st quarter earnings would be “the main determinant of the market’s direction in the next few weeks”.
And I expected that direction to be sideways or down citing analysts downard revision of earnings growth estimates from 8.7% at the beginning of the year to 3.3%, Tim Hayes from Ned Davis Research that times of slowing earnings growth tend to be challening ones for stocks and the fact that the 1st quarter of 2006 represented a real tough compare with earnings up 16% – and that was before it looked clear that there would be at least some fall out on consumer spending from the housing bust.
Well, we’re pretty much through earnings season and the market has done just what I couldn’t see it doing: powered right on up on the strength of much stronger than expected earnings. With 4/5ths of S&P 500 companies reporting it looks as though 1st quarter earnings growth will come in at about 9%, according to Joanna Ossinger of the Wall Street Journal (subscription required).
The Dow is up almost 700 points, 5.5%, in the 4 weeks since I wrote that post; the S&P is up about 60 or 4.2%. Both of them broke through psychological barriers i.e. Dow 13,000 and S&P 1500.
The economy still seems to be weakening with preliminary 1st quarter GDP coming in at 1.3% and April non-farm payroll growth coming in today at 88,000 – below the 110,000 consensus estimate. But it doesn’t seem to matter with the stock market up both last Friday on the GDP number and today on the jobs number.
The correction of February 27 seems to be well behind us.
Three (3) weeks ago (Mon 4/16) David Gaffen of Marketbeat wrote a post entitled “Never Mind That Correction” noting that the S&P 500 had recovered completely from that sell off and the ensuing volatility in early March to post a 6 1/2 year high.
Two weeks ago (Fri 4/20) Google reported excellent numbers powering the Dow up 153 to 12962 and the S&P 14 to 1484 – in clear striking distance of 13,000 and 1500, respectively.
Last Wednesday (Wed 4/25) a stronger than expected durable goods report for March, including an upward revision for February, powered the Dow up 136 points, shattering the 13,000 barrier (subscription required) to close at 13,090 – the S&P closed up 15 at 1495.
News Corps $60 per share, $5 billion, bid for Dow Jones on Tuesday and today’s news that Microsoft might be gearing up for a bid at Yahoo! powered the market ever higher – the S&P closed above 1500 yesterday for the first time since Sept 7, 2000.
Reuters was also up today on reports it had received a takeover approach and analysts at Merrill Lynch speculated that commodity companies like BHP Billiton and Rio Tinto might be private equity targets sending shares of commodity companies up (subscription required):
‘It’s deals – it’s all about deals. Everybody thinks every stock is going to get taken out,’ said Todd Leone, head of listed trading at Cowen & Co. ‘I personally don’t know what’s going to stop it.’
I think the risk/reward equation has changed since I wrote “The Wrong Question and The Right Question About Today’s Market”. After powering through earnings season, I think the market could be positioned for a large upward move. Liquidity and the consequent speculation are rampant i.e. risk is still high. But we’ve cleared a big hurdle and I can’t think of anything to stop this market right now.
I don’t necesarily see an upward move as rational. But I do see one as likely.
UPDATE (Wed 5/9, 10:30am): David Gaffen of The Wall Street Journal’s Marketbeat blog linked to this post yesterday afternoon.
To be clear, I think there is a real possibility of a “melt up” . Especially with earnings coming in so strong, this market is starting to feel “unstoppable”. The terrible economic and housing data don’t seem to matter. Liquidity still seems to be abundant and deals (Tue 5/1: News Corps bid for Dow Jones, Thomson’s bid for Reuters, Mon 5/7: Alcoa’s bid for Alcan), and rumors of deals (Fri 5/4: Microsoft’s supposed interest in Yahoo!), keep giving markets a boost. I think a small exposure to what appears to be the possibility of a big, crazy, upward move makes sense.