The market is not known for feelings beyond fear and greed. And yet, the hope occasioned by strong U.S. corporate earnings trumped investors’ concerns last week about violence in Ukraine and Middle East to send stocks higher by Friday’s close.
The positive finish came despite a big dip Thursday, which followed an all-time high Wednesday by the Dow Jones Industrial Average, the fifteenth this year. Small-company stocks lost ground, however.
The beginning of a ground war in Gaza and the downing of a commercial airliner over eastern Ukraine that caused nearly 300 deaths grabbed headlines Thursday. However, with second-quarter earnings season well underway, decent-to-strong profits from the likes of Honeywell International (ticker: HON), whose shares rose 2% Friday, dislodged the negative global news from investors’ focus. Intel (INTC), Morgan Stanley (MS), and UnitedHealth Group (UNH) also reported good second-quarter results.
The market responded to the strong results, says Kate Warne, investment strategist at Edward Jones, particularly since they seem to come from a nice cross-section of the American economy, such as industrials and big money-center banks. “That gives investors greater confidence that we will see continued good earnings,” she says.
Last week, the Dow advanced 156 points or 0.9% to 17,100.18, down slightly from the record high reached Wednesday of 17,138.20. The Standard & Poor’s 500 index rose 11 points to 1978.22. The Nasdaq Composite index rose 17, or 0.4%, to 4432.15. The small-cap Russell 2000 index bucked the trend, falling almost 0.7% to 1151.61.
Investors reacted to the headlines at first, but the real investor fear, Warne notes, was of a wider escalation of violence. When that didn’t happen Friday, stocks rose.
The week’s tragic events had a temporary psychological effect on the market, adds John Manley, chief equity strategist at Wells Fargo Funds Management, “but [they] won’t have a tremendous effect on the fundamentals.”
The Federal Reserve, he notes, is still “applying positive monetary pressure on stocks, valuations aren’t expensive, and earnings trends are good. What’s wrong with that?” He thinks second-quarter profits will end up surprisingly good.
Among investors, the crowd that passes for bears these days is one that calls for a correction of 10% or more in the market. “But a correction would come from a fundamental change,” says Warne. “It would come from a place the market doesn’t expect.”
This week the earnings season really heats up with reports from roughly 150 companies in the S&P 500.
(Source: Barrons Online)