June 24, 2017

Strategies: Dow Touches 15,000 but the Economy Lags

Yet in the financial markets, it’s a much happier world. An epic rally in stocks has been roaring ahead, with the Dow Jones industrial average on Friday briefly surpassing 15,000 for the first time.

Thanks to the intervention of the Federal Reserve, the bond market remains improbably strong, too. The benchmark 10-year Treasury rate fell as low as 1.612 percent last week, driving prices, which move in the opposite direction, to stratospheric levels. That helped Apple sell $17 billion of bonds at yields once reserved for the sovereign debt of only the safest governments.

In short, it’s been a giddy time to be an investor. But while the financial markets are soaring, the real economy appears to be mired in an endless slog. That discrepancy raises a troubling question: How long can financial portfolios continue to swell if wages, employment and corporate revenue remain constrained?

Unfortunately, there is no clear answer.

“The beauty of economics is that we are still arguing about the causes of the start and the end of the Great Depression,” said James W. Paulsen, the chief investment strategist at Wells Capital Management in Minneapolis. “We’ll be debating these questions for the rest of our lives.”

Economists and market strategists have plenty of opinions, however, and Mr. Paulsen, who takes a glass-half-full perspective on the current situation, is no exception.

He says the stock market rally can continue so long as the economy keeps growing at what he prefers to call a “modest” pace, rather than a disappointing one. Despite evidence to the contrary — most crucially, stubbornly high unemployment — he maintains that the recovery is actually quite good under the circumstances. And, he said, it’s robust enough for American corporations to churn out solid profits that will bolster stock returns.

That provides no comfort for people who are out of work or earning inadequate wages, he said, but it may reassure investors and be useful for public policy.

Why? Mr. Paulsen has been arguing for years that the annual rate of economic growth is likely to remain in the low single digits because of a long-term demographic shift: the aging of the American population. The working-age population has been expanding less rapidly, at an annualized rate of 1.1 percent from 1986 to 2012, down from 1.7 percent from 1960 to 1985.

Mr. Paulsen favors liberalizing immigration rules, which would reverse this trend and spur more robust growth, he said. Until that happens, he said, “it’s possible that 4 percent annual growth is all we are going to get, and we should be happy with it.”

In the first quarter of this year, the annualized G.D.P. growth rate was only 2.5 percent, he points out, but it would have been 4 percent if the effects of government budget cuts had been excluded. Government austerity is a drag on the economy now, he said, but is likely to become less severe at some point, when a longer-term solution replaces the draconian budget sequestration.

Whatever the reason for less-than-stellar economic growth, American companies have been reaping handsome profits. And corporate America’s ability to preserve its profit margins has been a linchpin of the market rally, said David J. Kostin, the chief United States equity strategist at Goldman Sachs.

An important metric, recurring profit margin, has plateaued near 9 percent, according to his calculations, and as long as it continues at that level, it should be enough to propel the market upward. Last week was the heart of earnings season for American companies. More than 80 percent of the companies in the S. P. 500 have reported results for the first quarter and, by and large, they fared well, he said.

“The stock market is trading at fair value today, and I think it can continue to climb higher in line with earnings growth,” he said.

Goldman projects that the American economy will grow at a rate of 2 percent this year, he said. In the quarter, sales reported so far at S. P. 500 companies — which include revenue from faster-growing markets like China’s — were virtually flat, according to Thomson Reuters I/B/E/S. But profits grew 5.7 percent. “We aren’t seeing an extraordinary level of economic growth,” he said, “so companies need to take other measures to enhance profits.”

ONE thing that companies are doing is “being very careful about costs and about hiring,” he said, which helps explain the anemic labor market. And by borrowing at low rates, businesses can use the money for productive purposes or to engage in financial engineering.

They can buy back shares — thus increasing earnings per share — or increase dividends or both, which is what Apple plans to do with its borrowed billions. (Apple is keeping a cash hoard of more than $100 billion overseas, at least partly to avoid incurring a tax liability in the United States.)

Low interest rates will be with us a good while longer, Fed policy makers reiterated last week. They said they’d keep rates low as long as inflation was subdued and unemployment stayed high. In fact, they suggested that they might even add stimulus — increasing their $85 billion a month in bond purchases — if economic conditions worsen.

“For the stock market the Federal Reserve is the big wild card,” said Ed Clissold, United States market strategist at Ned Davis Research in Venice, Fla. “As long as the Fed and the other central banks keep pumping liquidity into the economy, our base case is that the cyclical bull market in stocks can continue.”

But Mr. Clissold said the lack of meaningful sales growth for S. P. 500 companies concerned him. Weak sales could presage a drop in profit margins, he said. And if profit margins decline sharply — by about 10 percent or so — history suggests that it’s time to say goodbye to the bull market. And that’s the least of it.

A sharp drop in sales and profit margins might also be an early indicator of an outright recession. That would bring untold pain to many people, not just stock investors.

For now, though, while he is scrutinizing the numbers closely, they appear to be benign.

It may not be a great economy, but the financial markets are partying on.

Article source: http://www.nytimes.com/2013/05/05/your-money/dow-touches-15000-but-the-economy-lags.html?partner=rss&emc=rss

Stocks and Bonds: Stock Slide Extends to Wall Street

Meanwhile, the bankruptcy of the brokerage firm MF Global sent some ripples through the markets, reducing trading volumes as its traders were barred from commodity exchange floors in Chicago and New York, but analysts and traders said its effects were minor compared with the actions in Greece.

Declines that started in Asia accelerated in Europe — where the major indexes slumped 5 percent. Bank stocks led the sell-offs, and the broad United States stock market slid nearly 3 percent. In the credit markets, crucial stress gauges moved toward recent highs, while rising interest rates on Italian debt underscored investors’ growing doubts about that highly indebted country, which has become the new focus of concern in the euro zone.

“It is all Europe right now,” said Eric Green, an economist at TD Securities in New York.

The Greek referendum threatened to undo the work of the summit meeting last week in Brussels, where leaders outlined a rescue plan that cheered markets and contributed to the biggest monthly United States stock market rally in October since 1982.

“The markets don’t know which way to look,” said Andrew Wilkinson, an economist at Miller Tabak Company.

“This has absolutely blindsided markets.”

The declines in Europe wiped out the exuberant gains of last week after the Brussels deal, which initially led some investors to believe Europe was addressing the Greek problem. The reversal in Greek markets included insurance contracts on bonds pricing in a higher likelihood of default.

Even last week doubts grew that the grand European plan would be enough to stop the crisis from spreading to Italy, a much bigger economy that has to refinance billions of euros of debt in the coming year.

Italy has a small budget deficit of about 3 percent of its gross domestic product, which means it has a relatively small amount of net new borrowing to do, although this percentage may be revised upward if growth slows next year as expected.

The much bigger problem is its mountain of existing debt that must be rolled over as it matures — about 52 billion euros this year and 307 billion more next year, according to Tobias Blattner, an economist at Daiwa Securities in London.

As Italy’s borrowing costs shoot up — the 10-year government bond yield jumped to a record 6.33 percent on Tuesday — investors are concerned that too much of its strained budget will be consumed by the costs of its enormous debt.

In signs of a reappearance of stress in the European credit markets, the rates that banks charge to lend euros to one another rose, and the costs to banks of swapping euros for dollars in the open foreign exchange market — the three-month euro-dollar cross-currency basis swap — also increased sharply.

The cost of insuring the debt of a basket of European banks against default rose to the highest level since Oct. 5. It now costs $261,000 to insure $10 million of bank debt annually for five years, compared with $207,000 at the end of last week, according to the data provider Markit.

Analysts said European leaders had so far failed to come up with a clear solution to cope with a problem on the scale of Italy’s debt.

Officials had proposed maximizing the European bailout fund, though they did not offer details, and in particular had not defined a role for the European Central Bank, analysts said.

The central bank was buying bonds to support the Italian bond market on a large scale on Tuesday, traders said. But many analysts say it is inevitable that the central bank will have to act much more aggressively, in effect printing money by buying hundreds of billions of euros of bonds from peripheral countries like Italy.

Such an action, however, is politically poisonous in countries like Germany where the public fears inflation. It would be a big test for Mario Draghi, the new president of the European Central Bank, whose first day in office was Tuesday.

Article source: http://feeds.nytimes.com/click.phdo?i=b82ce174442291fc2250f46084ad84b9

Markets Ahead on Hopes for European Bank Plan

However, mounting expectation of a wave of recapitalization in the European banking sector as well as Erste Group Bank’s warning that it would make a big loss this year prompted European investors to lock in some of the recent strong gains made in banking stocks.

On Wall Street, the Standard Poor’s 500-stock index opened sharply higher, with an early gain of 2.7 percent. The Dow Jones industrial average gained 2.3 percent and the Nasdaq composite index rose 2.9 percent.

At midafternoon in Europe, the Euro Stoxx 50 was up 0.6 percent. The FTSE 100 in London was up 0.9 percent and the DAX in Frankfurt rose 0.7 percent. Europe’s main volatility index dropped to its lowest level since early September.

“We’re getting signals on a lot of fronts that the end of the crisis is coming,” said Valerie Gastaldy, head of the Paris-based technical analysis firm, Day By Day.

“The bottom line for European equities is that banking stocks have recently shown resilience despite that nothing has really changed on the news front. The question now is: Is this the start of a bear market rally that will last for a few weeks, or is it the start of a trend that could go on for six months? It too early to say.”

German bond futures hit their lowest level since early September on Monday, signaling a potential change in trend.

Shares of Erste Group Bank tumbled 14 percent after the East European lender warned it would post a big loss on the year and would not pay a dividend after taking hits on its foreign currency loans in Hungary and euro zone sovereign debt.

Société Générale was down 0.4 percent, HSBC down 0.2 percent and UBS down 0.3 percent, as investors locked in recent gains.

Over the weekend, the German chancellor, Angela Merkel, and the French president, Nicolas Sarkozy, said they would work out a plan to recapitalize European banks, come up with a sustainable answer to Greece and accelerate economic coordination in the euro zone by the time of a Group of 20 gathering in Cannes, France, on Nov. 3-4.

“Recapitalizing the banks would be a strong signal sent to the market, even if banks don’t necessarily need fresh funds,” said Benoit de Broissia, an analyst at KBL Richelieu.

“It would help ease the tensions and restore investors’ confidence in the sector. The best solution would certainly be an investment from states in the form of preferred shares that could be bought back when things settle down.”

Article source: http://feeds.nytimes.com/click.phdo?i=ac4416890a3aa6dbc01b6ba71cc375e0

S.&P. Closes at Highest Level Since June 2008

Better-than-expected earnings reports from companies ranging from airlines to office products manufacturers helped drive a broad stock market rally that included all 10 company groups that make up the Standard Poor’s index. Industrial companies gained nearly 2 percent, the most of any group.

The Ford Motor Company reported its best first-quarter earnings since 1998. The carmaker topped Wall Street’s earnings estimates with stronger sales of new vehicles. Ford shares rose 0.77 percent.

The 3M Company, which makes Post-Its and Scotch Tape, said quarterly profit jumped 16 percent from a year ago, also topping analysts’ estimates. 3M raised its full-year earnings expectations despite taking a hit from the earthquake in Japan. Its share rose 1.9 percent.

Delta Air Lines said rising fuel prices played a large role in pushing its quarterly loss to 38 cents a share. Analysts expected worse. Delta shares jumped 11 percent.

The engine maker Cummins gained 7.6 percent after it said that it was raising its profit forecast for the year because of strong demand.

Shares of United Parcel Service rose 0.9 percent after it also raised its earnings estimate for the year after its quarterly results topped analysts’ expectations.

Coca-Cola’s stock fell 1.2 percent after its earnings per share fell a penny short of Wall Street’s expectations. First-quarter net income rose 18 percent as sales overseas gained strength.

The latest report on home prices, the Standard Poor’s Case-Shiller composite index of 20 metropolitan areas declined 0.2 percent in February from January on a seasonally adjusted basis, slightly better than forecasts for a drop of 0.3 percent. Prices in the 20 cities have fallen 3.3 percent from February a year ago.

At the close, the Dow Jones industrial average was up 115.49 points, or 0.93 percent, at 12,595.37, while the broader Standard Poor’s 500-stock index added 11.99 points, or 0.9 percent, to close at 1,347.24. The technology heavy Nasdaq gained 21.66 points, or 0.77 percent to 2,847.54.

The Dow is up 8.8 percent for the year, while the S.P. and the Nasdaq are up more than 7 percent.

Stocks also got a lift from a report on consumer confidence. The Conference Board said its confidence index rose in April after falling in March. The index is based on the board’s survey, which showed that worries about rising prices and unemployment eased. Among the encouraging signs, those who said jobs are “hard to get” dropped, while those who expected higher incomes rose.

The market’s continued rebound is crucial to luring nervous Americans back into investing in stocks, said Alan Gayle, senior investment strategist at RidgeWorth Investments in Richmond, Va.

Mr. Gayle says he talks to a lot of retail investors who were burned when markets dropped in 2000 and 2008 and remain wary of putting their savings into stocks.

“The stock market in the last 10 years has disappointed a lot of investors,” he said. “There are some lasting scars there.”

The Federal Reserve begins a two-day meeting on Tuesday. Economists expect the Fed will leave short-term interest rates unchanged and end its $600 billion bond-buying program in June as scheduled. The bond-buying effort has been credited with lifting financial markets since the Fed chairman, Ben S. Bernanke, first hinted of it last August.

Indexes in Europe closed higher as traders returned from the Easter holiday and shrugged off the latest bad budget news from crisis-stricken Greece.

After being closed since Thursday, the Dax in Frankfurt rose 0.84 percent. The FTSE 100 index in London was up 0.85 percent, while the CAC 40 in Paris was up 0.58 percent. Asian shares fell on disappointing quarterly earnings in the United States.

Greece’s struggle with its heavy debt burden produced more downbeat news, with the European statistics agency Eurostat saying the country’s budget deficit rose last year to 10.5 percent of G.D.P., above the forecast 9.6 percent.

A sharper revision of Greece’s budget deficit had started Europe’s debt crisis in late 2009, but this one was largely reported ahead of time in news media and priced in by the markets. The country has been bailed out by the European Union and the International Monetary Fund and is still struggling to avoid having to restructure its debts.

Analysts at Crédit Agricole said this revision’s impact was lessened by improvements in Greece’s formerly lax statistics keeping and by the announcement of more cutbacks to address the increased deficit.

“On the bright side, now that Eurostat and I.M.F. experts have labeled Greece’s public finances data as more reliable, one could expect this revision to be the last of a long series, and the Greek government already announced additional austerity measures to offset the corresponding fiscal shortfall,” they said.

In Asia, mixed American corporate earnings sent Asian stocks lower as traders waited for the Fed’s updated outlook on the world’s biggest economy.

Japan’s Nikkei 225 index closed down 1.2 percent, to 9,558.69 , with investors unloading blue chip shares ahead of what is expected to be a punishing earnings season. Nintendo announced Monday that its annual profit dropped for the second consecutive year as sales of its gaming devices fell.

Benchmark crude for June delivery was down 24 cents, to $112.04 a barrel in New York trading.

Article source: http://www.nytimes.com/2011/04/27/business/27markets.html?partner=rss&emc=rss