- The mixed-bag economy and mixed-bag market continue to call for defensive
contingency plans.
- Given what we know today, a rapid and sustainable push to new highs in
stocks appears to be the least likely scenario, behind consolidation/correction.
- Earnings have been decent so far, but Wall Street makes sure the expectation
bar is set at a comfortable level.
- An allocation of stocks, bonds, and cash allows for needed flexibility
and migration paths until a more dominant theme can emerge.
Playing The Low Estimate Game
Isn't amazing how the majority of companies meet or beat earnings expectations
quarter after quarter? Wall Street has always done a nice job of managing investor
expectations. From Bloomberg:
"It's quite likely that U.S. earnings will beat expectations because
analysts have set the bar quite low," James Butterfill, who helps oversee
about $50 billion as head of global equity strategy at Coutts & Co.,
said by phone from London. "There probably won't be any particular pressure
on margins this quarter, so earnings momentum will continue to rise. I
do expect the harsh winter to have impacted the most energy-intensive companies."
Inflation Aligns With Ongoing Fed Taper
The good news Tuesday came on the earnings front, with Coca-Cola (KO) and
Johnson & Johnson (JNJ) eliciting a bullish response. The bad news was
related to inflation. From Reuters:
U.S. consumer prices rose in March, but inflation pressures remained
generally benign, which should give the Federal Reserve ample scope to
keep interest rates low. The Labor Department said on Tuesday its Consumer
Price Index increased 0.2 percent last month as a rise in food and shelter
costs offset a decline in gasoline prices. Economists polled by Reuters
had expected a 0.1 percent rise.
Central bankers tend to print money until inflation forces them to slow down
the presses. Today's inflation data aligns with an ongoing Fed taper.
Ukrainian Military Action?
The unrest continues between Russia and Ukraine. It is possible the markets
will have to digest some form of military action, which checks a glass half
empty box. From The
Wall Street Journal:
A Ukrainian military operation to wrest control of cities in the east
from pro-Russian militants has begun, Ukraine's acting president said Tuesday,
as Russia's foreign minister warned use of force could derail international
talks on the crisis. Oleksandr Turchynov said that a phased "antiterrorist" operation
began in the early morning hours in the northern Donetsk region, where
the majority of the cities commandeered by pro-Russian forces are located.
But there were no immediate reports of specific action and it was not clear
how big the effort was.
Investment Implications: Mixed Bag = Mixed Allocation
From a fundamental perspective, there are many positives (earnings Tuesday)
and many negatives (Fed taper). From a technical perspective, the longer-term
trends remain bullish, but the intermediate-term trends shifted to a "risk-off" stance last
week. Our nearly equal weights to cash, stocks (SPY), and bonds (TLT) remain
appropriate for the current mixed investment climate.
Resistance Test Would Come At 1,850
Another example of a mixed picture is the chart of the S&P 500 below.
The good news is the index has gained back 25 of the 49 points lost last week
(early in Tuesday's session). The bad news is various forms of prior support
(green arrows below) and prior resistance (red arrows) seem to be congregating
near 1,850ish. A reversal below 1,850 could bring a return to last week's risk-off
environment. A decisive break above 1,850 could open the door to a retest of
the recent highs (near 1,900).
We have shown frustrating and indecisive charts in recent
articles. We could produce additional examples from numerous corners
of the market, including the chart of the small cap ETF (IWM) below. If investors
had strong convictions about a brighter economic future, we would expect
small caps to be performing well, rather than treading water for six months.
Indecisive markets are frustrating animals. If we remain patient and disciplined,
the market will tip its hand. For now, a mix of stocks, bonds, and cash offers
an appropriate balance between risk and reward. We questioned the sustainability
of the bullish advance in stocks on April
4 with the S&P trading at 1,865. We remain concerned with the S&P
trading at 1,827.
