The major U.S. indexes finished mixed, but little changed last week, unable to hang on to gains that came Wednesday after the Fed said U.S. interest rates would remain low into 2014.
Instead, the January rally was slowed by soft economic results, and fourth-quarter earnings reports that were—apart from Apple’s (ticker: AAPL) spectacular results—lackluster. Slowing corporate-revenue growth may also be rearing its head.
Some price support may have come from an increasing sense that negative euro-zone events, which pummeled U.S. shares last year, are losing the power to destabilize stocks here.
The Dow Jones Industrial Average fell 60 points, to end the week at 12,660.46, off 0.47%, ending a three-week win streak. The Nasdaq Composite managed to add 29.85 points, or 1%, ending at 2816.55.
This year so far, the U.S. market seems to be doing a lot better job of “taking shots from Europe,” says Ryan Larson, head of trading at RBC Global Asset Management. The economic data were mixed and earnings muted. “The U.S. market is finding its own legs now, so it will be important to see if we can continue” to ignore Europe.
Barry Knapp, chief equity strategist at Barclays Capital, concurs. “The European Central Bank has done enough for now to stop the low-level run on the European banking system. There’s been a mitigation of the contagion risk.”
The proof, he adds, comes in various measures of market risk, which have returned to more normal levels. For example, during the August to November market maelstrom, the correlation among stocks was high at 0.9, meaning most stocks were moving in unison, either up or down. Now, that correlation is 0.15, he says.
Meanwhile, the fourth-quarter earnings season is “weak, once you take out Apple,” Knapp avers. Profit margins are coming under pressure in some sectors, particularly consumer-related, and global growth is falling to U.S. levels. And gross-domestic-product growth came in under forecast.
These headwinds aren’t enough to justify a sharp selloff, but a near-term correction is possible, he says, as investors realize that the U.S. economy is only bouncing back to trend, rather than improving; Apple distorts the numbers and it’s almost “its own asset class,” Knapp adds.
Apple said on Tuesday that continued strong demand for its products boosted sales by over 70%, to $46.3 billion, in its first fiscal quarter, ended Dec. 31, 2011. Earnings were $13.06 billion, up from $6 billion in the year-earlier period.
For once, the economic news last week was mixed, breaking a stretch of mostly expansive data. In particular, the U.S. fourth-quarter GDP figure released Friday was somewhat weaker than expected, at 2.8%, versus the 3% forecast. More importantly, the number was less impressive than it looks, as most of the growth came from inventory-building, which contributed 1.9% of the expansion.
With more than 180 of the companies in the S&P 500 index reporting, there have been 1.81 fourth-quarter positive profit surprises for each disappointing report, according to Zacks’ chief investment strategist, Dirk van Dijk. A more normal ratio is 3:1—so corporate profit growth is indeed slipping. Additionally, revenue growth is tracking lower, an aggregate 6% rise seen so far, down from 9% in the third quarter (Source: Barrons Online).