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Stocks experienced another volatile week with high daily swings in value. Despite the lingering uncertainty, stocks ended the week higher on the back of better-than-expected earnings reports and higher oil prices. For the week, the S&P 500 gained 1.75%, the Dow grew 2.32%, and the NASDAQ added 0.50%.1
Fourth-quarter earnings season is in full swing and will continue to play a role in stock performance in future weeks. With reports in from 201 S&P 500 members, overall earnings are down 3.2% on 3.6% lower revenues from Q4 2014. The overall picture so far is one of growth challenges from a slowing global economy, a strong U.S. dollar, and weak commodity prices. However, despite the challenges, 72.5% of firms have been able to beat their earning targets, indicating that managers are doing a good job of managing expectations.2 On the other hand, reports show that the headwinds that dogged earnings last year will affect performance in 2016 as well.
We also got our first look at fourth-quarter economic growth, which showed that the economy grew at a lukewarm 0.7% pace in the final months of 2015. Low consumer spending weighed on growth, suggesting that Americans are pocketing gasoline savings instead of spending them.3 We certainly can’t fault folks for financially prudent behavior, but consumer spending accounts for 70% of economic activity. While we can attribute some of the slow economic growth to seasonal factors like an unusually warm winter, analysts will be closely watching data releases in the weeks ahead for signs of deeper weakness.
After meeting for the first time in 2016, the Federal Reserve declined to raise interest rates last week but gave no indication that it intends to abandon rate hikes later this year. Predictably, talking heads exploded on all sides. Some believe that the Fed made a mistake by not raising rates and giving markets more confidence in the economy. Others believe that the Fed is being appropriately cautious given the market turmoil and concerns about economic growth. What’s clear is that the Fed is telling investors: “We’re aware of the uncertainty and we’re keeping an eye on many indicators.”4
Bottom line
In our view, market volatility will remain with us for the foreseeable future. While investors appear to be cheerful about earnings that are consistently beating expectations, sentiment could turn on a dime. We’re keeping an eye on fundamentals and are suggesting prudent changes where we deem necessary.
Looking ahead, we expect attention to remain on earnings releases as well as a raft of economic reports that could show whether the economy is slowing or not. Traders will be especially interested in seeing if Friday’s January jobs report shows sustained strength in the labor market.
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