Are you ready for some real news? How about corporate earnings? While there is some economic data on tap, the Q1 earnings season starts in earnest this week. With questions about economic strength, the dollar and the Fed in mind, pundits will be looking for fresh data. They will be asking:

Can resurgent corporate earnings revive the stock rally?

Last Week

Last week the news was heavy but generally neutral. Strong economic data caused celebration. The Fed minutes and concerns about tax reform were the biggest negatives.

Theme Recap

In my last WTWA I predicted special attention to the Trump-Xi meeting. That was a good call, with plenty of discussion all week. The talks did not yield much news, but there might be a lesson from that as well.

The Story in One Chart

I always start my personal review by looking at a weekly chart. While there was not much of an overall change this week, Wednesday was the exception. Stocks moved sharply higher after the ADP number and sold off sharply in the afternoon, perhaps because of reaction to the Fed minutes, perhaps because of tax reform prospects.

 

The News

Each week I break down events into good and bad. Often there is an “ugly” and on rare occasion something very positive. My working definition of “good” has two components. The news must be market friendly and better than expectations. I avoid using my personal preferences in evaluating news – and you should, too!

This week’s news was neutral.

The Good

  • Construction spending rose 0.8%. Steven Hansen (GEI) is not convinced.
  • Rail traffic in March increased 7.3% (AAR).
  • ISM manufacturing maintained recent strength at 57.2. Scott Grannis offers this chart.

  • ADP private employment registered a change of 263K, handily beating expectations.

  • Weekly jobless claims dropped to 234K

 

The Bad

  • Tax reform prospects seemed to get worse at least that was the market take on Speaker Ryan’s press conference.
  • The Fed may be reducing its balance sheet. (Reuters). Fed expert Tim Duy thinks that balance sheet reduction will be gradual.
  • Auto sales were surprisingly weak. Calculated Risk concludes:

    This isn’t a huge concern – most likely vehicle sales will move sideways at near record levels. But the economic boost from increasing auto sales is probably over.

  • ISM services dropped to 55.2. This is still a strong level, of course, but any dip from a peak is drawing attention.
  • Non-farm payrolls registered a net increase of 98K, well below expectations. Doug Short has a nice chart pack, including this rolling average interpretation of non-farm payrolls.

 

The Ugly

Rising global threats including Syrian gas attacks, North Korean challenges, and more terrorist attacks.

The Silver Bullet

I occasionally give the Silver Bullet award to someone who takes up an unpopular or thankless cause, doing the real work to demonstrate the facts. No award this week, but nominations are always welcome. There are many bogus claims and charts out there!

The Week Ahead

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. That is the purpose of considering possible themes for the week ahead. You can make your own predictions in the comments.

The Calendar

We have a normal week for economic data, including releases on Friday when financial markets are closed.

The “A” List

  • Michigan Sentiment (T). Continued high readings and debate over “soft” data.
  • Retail sales (F). Will negative consumer news be confirmed?
  • Initial jobless claims (Th). Is the series edging up from record low levels?

The “B” List

  • JOLTS (T). February data. This is about labor market structure, not job growth!
  • PPI (Th). Still tame, with more of the same expected.
  • CPI (F). See PPI. The core increase is starting to approach the Fed’s target level.
  • Business inventories (F). Not much expected from this February data.
  • Crude inventories (W). Recently showing even more impact on oil prices. Rightly or wrongly, that spills over to stocks.

     

The schedule is light on FedSpeak and many markets around the world are closed on Friday.

Next Week’s Theme

In a normal week for economic data the start of the Q1 earnings season will command attention. Geopolitics will grab some headlines, but market participants are eager to see if the recent stock market strength is supported by corporate earnings. The key question?

Will resurgent earnings revive the rally in stocks?

Each earnings season sees a revival of a familiar theme: Companies guide expectations lower. The final report is a “beat” compared to this lowered bar.

More objectively, observers can compare earnings to the prior year. The weak energy sector has been a drag on these comparisons, leading to an “earnings recession.” This name was attached to two consecutive quarters of decline. This quarter seems more promising. Earnings expert Brian Gilmartin does a sector-by-sector analysis, concluding that this quarter might see S&P 500 growth of 12-14%.

John Butters of FactSet notes that current expectations are an increase of 8.9%, but that “double-digit” growth is more likely. He looks at the history of “beat rates.”

 

What does this all mean for investors? As usual, I’ll have a few ideas of my own in today’s “Final Thought”.

Quant Corner

We follow some regular featured sources and the best other quant news from the week.

Risk Analysis

Whether you are a trader or an investor, you need to understand risk. Think first about your risk. Only then should you consider possible rewards. I monitor many quantitative reports and highlight the best methods in this weekly update.

The Indicator Snapshot

 

 

The Featured Sources:

 

Bob Dieli: The “C Score” which is a weekly estimate of his Enhanced Aggregate Spread (the most accurate real-time recession forecasting method over the last few decades). His subscribers get Monthly reports including both an economic overview of the economy and employment. (see below).

Holmes: Our cautious and clever watchdog, who sniffs out opportunity like a great detective, but emphasizes guarding assets.

RecessionAlert: Many strong quantitative indicators for both economic and market analysis. While we feature his recession analysis, Dwaine also has several interesting approaches to asset allocation. Try out his new public Twitter Feed.

Georg Vrba: The Business Cycle Indicator and much more.Check out his site for an array of interesting methods. Georg regularly analyzes Bob Dieli’s enhanced aggregate spread, considering when it might first give a recession signal. His interpretation suggests the probability creeping higher, but still after nine months.

Brian Gilmartin: Analysis of expected earnings for the overall market as well as coverage of many individual companies. His most recent post notes that the expected growth rate in S&P earnings is now 8.41% — the highest level since October, 2014.

Doug Short: The World Markets Weekend Update (and much more). His Big Four chart is the single best method to monitor the key indicators used by the National Bureau of Economic Research in recession dating. The latest update now includes the employment data.

 

 

How to Use WTWA (especially important for new readers)

In this series, I share my preparation for the coming week. I write each post as if I were speaking directly to one of my clients. Most readers can just “listen in.” If you are unhappy with your current

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