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April Showers

04/16/2012

As of the close on Friday, April 13, 2012, the S&P 500® Index (SPX) (Figure 1.1) has now corrected 3.7% from the four-year high established on April 2, 2012 at 1422.38. On Tuesday of this past week, the correction reached its deepest point at 1357.38 for a loss of 4.6%.
 
This past week has also been the Easter and Passover school break. It is great to see the kids running around the house with an extra boost from all the holiday chocolate. I spent the week digesting early earnings reports, China data, European credit markets, and raiding the kids’ holiday chocolate stash.
 
I also spent this week putting the finishing touches on our upcoming quarterly commentary “Third Time’s the Charm?” which should be available this week. As a prelude to the commentary, I will just tease that having the kids off for the vacation is a much needed reminder that sometimes it’s better to look away and “smell the roses” than to make quick decisions during an uncertain capital markets environment.
 
•  Reflecting back upon the week in the markets, for the first time this year a “less is more” strategy seems warranted. I expect the proper strategy for positioning is to move from overweight to market weight, not underweight.  
 
•  The conversations surrounding U.S., European, and Chinese monetary policy all suggest the need for further easing. I expect Europe has the greatest need for further QE, whether it is a third round of LTRO or more likely just further sovereign debt purchases.  The recent price action in Spain’s 10-year bond (Figure 1.2) highlights the need. If correct, that will keep support under the U.S. dollar (Figure 1.3).
 
•  Tremendous uncertainty in the U.S. will persist regarding the FOMC’s intent for further QE or not in the next few months. Thursday’s rise in initial jobless claims (Figure 1.4) supports the dovish argument for further easing while the hawkish stance was supported by an improvement in the trade balance (Figure 1.5) from a $52.6 billion deficit to $46.0 billion, the result of which suggests Q2 GDP is tracking higher toward 2.5% than the previously thought 2.0%.
 
Finally, I am most focused on earnings season. This past week, SPX heavyweights JP Morgan, Google, and Wells Fargo reported. The week ahead of the earnings calendar is full, and these are the potential market movers that I will focus on. Thursday will be an important day.
 
•  Monday – Citigroup (C)
 
•  Tuesday – IBM; Intel (INTC), Coca-Cola (KO), Johnson & Johnson (JNJ), US Bancorp (USB), CSX
 
•  Wednesday – Yum Brands (YUM), Halliburton (HAL), American Express (AMEX), Qualcomm (QCOM)
 
•  Thursday  - Peabody Energy (BTU), Chipotle Mexican Grill (CMG), Philip Morris (PM), Morgan Stanley (MS), Bank of America (BAC), United Health (UNH), Baxter (BAX), Union Pacific (UNP), Microsoft (MSFT), EMC, Freeport-McMoRan (FCX), DuPont (DD), Danaher (DHR)
 
•  Friday – McDonald’s (MCD), Schlumberger (SLB), General Electric (GE), Honeywell (HON)  
 
Certainly, there have been some April showers present in a capital markets landscape without much rain this year. I expect those showers will bring flowers – eventually. However long the showers persist is rather uncertain for now.   
 
Figure 1.1 S&P 500 Index, Month of April 2012

Source: Bloomberg
 
Figure 1.2 Spain’s 10-Year, Past 52 Weeks

Source: Bloomberg
 
Figure 1.3 U.S. Dollar, Past 52 Weeks

Source: Bloomberg
 
Figure 1.4 Initial Jobless Claims Year to Date

Source: Bloomberg
 
Figure 1.5 Trade Balance, Past 52 Weeks

Source: Bloomberg
 

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