Weighing The Week Ahead: Will Springtime Bring Some Optimism?

Some weeks feature a contrast between past and future — a possible inflection point. Here are the current elements:

1. Important economic data with a forward look;
2. Earnings news from major companies reporting on Q114;
3. Corporate conference calls explaining the outlook for future earnings; and finally
4. Economic implications for improved economic growth and business conditions worldwide.

It is a big week for news and data.

Prior Theme Recap

Last week I expected the theme to emphasize volatility. The market was at interesting technical levels and there was plenty of news to push it one way or the other. In a sense I was right about the theme, since the talking heads made the moderate crossings of “unchanged” seem like big news. The volatility cocktail was more like a Shirley Temple.

The potential was there, but the economic news was mostly calming. The contribution of mixed corporate earnings was enough to prevent a major market move either way. It is easy to measure volatility objectively. The VIX index gauges the market expectations for changes in the S&P 500. (If you spend five minutes with this post from Bill Luby at VIX and More, you’ll know more than almost anyone about the VIX). Here is the chart for the week:

By the end of Thursday’s trading, the options market was already factoring in a quiet three-day weekend.

While the theme did not play out last week, it looked promising on Monday and Tuesday. Here is what I wrote last week:

If earnings satisfy, it might have a calming effect. This will be especially true if we get a little more confidence in forward outlook, some hints about future hiring, and more planned capital expenditures. In that case we could have a rebound, with plenty of reduction in the VIX.

As I try to emphasize, forecasting the theme is an exercise in planning and being prepared. Readers are invited to play along with the “theme forecast.” I spend a lot of time on it each week. It helps to prepare your game plan for the week ahead, and it is not as easy as you might think.

Naturally we would all like to know the direction of the market in advance. Good luck with that! Second best is planning what to look for and how to react.

This Week’s Theme

At economic inflection points it is normal to have a mix of optimists and pessimists.

• Representing the pessimists we have a trader perspective that was well-received at Seeking Alpha. The argument is one I frequently hear from trader friends and individual investors. The author examines various trends before concluding as follows:

  Hence, I expect the Fed to continue with its one-size-fits-all approach of QE, opting to reverse tapering and return its foot on the monetary accelerator. But, having largely continued stalling for the past five years, I also expect the gears of the economy to remain stuck in neutral. A stagnant economy that is held up artificially and not allowed to correct naturally but that also lacks the inherent energy and dynamism to grow with any persistence and sustainability.

• On the side of the cautious optimists (the only brand we see), Chuck Mikolajcak at Reuters has the story: Wall Street Week Ahead: Spring fever brings hope for U.S. earnings. He notes that the upcoming reports reflect a cross-section of companies, an end to cold weather worries, and special attention to Chinese growth slowing.

• A more balanced look comes via Josh Brown. He notes that we might see the first actual decline in quarterly earnings since 2012, and explains the lower and beat pattern of the expectations game. Josh writes as follows (and also provides a helpful chart):

  …(T)he good news is that analysts have been willing participants in the beat-and-lower phenomenon for years now. You can see the downward revisions (green bars) being handily exceeded by actual results almost every time. Beat rates for the S&P as a whole have been running at a rate of 60 to 70% pretty consistently for the period pictured. We’ll see if they can pull it off again and avoid the first quarter of year-over-year negative earnings growth since Q3 2012.

From these sources, it would seem that we should not expect much economic and market optimism, even as the weather improves. As usual, I have some thoughts that I will share in the conclusion. First, let us do our regular update of the last week’s news and data. Readers, especially those new to this series, will benefit from reading the background information.

Last Week’s Data

Each week I break down events into good and bad. Often there is “ugly” and on rare occasion something really good. My working definition of “good” has two components:

1. The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially — no politics.
2. It is better than expectations.

The Good

There was plenty of economic news, and on balance it was very good.

• Rail traffic is showing strength. GEI has good advice on how to look past the noisy weekly data. The post also has plenty of charts for those who want to do their own research.
• Hotels are having a big year, the best since 2000 according to Calculated Risk. That squares with my own travel experience.
• Fed news was positive. The Beige Book showed a positive outlook (via the WSJ) and Fed Chair Yellen made an encouraging speech, without any slips about the timing of rate increases.
• Retail sales rose 1.1% beating expectations.
• Greece bond yields decline further, now below 5%. Felix Salmon has a nice post citing the top five reasons for the successful auction. Your favorite perma-bear or conspiracy site either did not mention this news, or asserted that disaster still looms. It is interesting that some use “kicking the can” to apply to policies, but not to their own errant predictions. If you missed my “Faceoff” piece – Jeff versus John Mauldin on the record you can see what we both thought a few years ago. That is always more challenging than coming up with reasons after you know what happened.
• LA port traffic has hit another new high. Bill McBride at Calculated Risk has the full story and charts, concluding, “This suggests an increase in trade with Asia in March.” 
• Sentiment is more negative and that is a positive since it is a contrarian indicator. Barry Ritholtz explains and provides this chart: