Like most of January, last week was filled with a number of happenings even though, on its face, it looked like a solid week for stocks.
You've probably heard the (possibly) good news, after moves between 2% and nearly 4% last week, all three of the major market indices traced back year-to-date losses to close last week at essentially breakeven levels.
But in our view, two things need to be pointed out.
First, following what the market viewed as a bullish January employment report, the Fed-hike-is-on view resurfaced. Coupled with upward revisions to prior months, the January payroll gain of 257,000 means 1 million jobs were created in the last three months. That's the best level in 17 years, and we can see why market think knee-jerked to Fed hike. The rebound in wage growth helped foster that view, which in turn led to a sharp jump in the 10-year, which closed last week at 1.95%. That move pummeled high-dividend-paying stocks like utilities and REITs as the Utilities SPDR (XLU) dropped 4% on Friday, while the SPDR Dow Jones REIT ETF (RWR) fell just shy of 3% that day.
But when we look at the vector of that job creation, we find that January was the lowest month for job creation in the last three. January PMI data, as well as the ISM manufacturing index for the month, all slumped sequentially. Data under the hood of those reports -- weaker orders, backlog -- do not point to a pronounced upturn in the short run. Given current inflation trends and modest wage growth here at home, as well as the tepid global economy outside the U.S, we would not be shocked to hear Fed Chief Janet Yellen remain dovish when she testifies before Congress on Feb. 24.
Remember, the impact of recent oil patch firings and slashed projects, as well as weather disruptions, have yet to turn up in the data. This raises the possibility that Friday's move in 10-year Treasuries could once again be a head fake like the several we've seen in recent quarters.
Turning to the week ahead, we've got a much slower pace of economic data and earnings reports ahead of holiday weekend (the markets closed Feb. 16 for Washington's Birthday). Aside from the weekly data, the two key barometers that we'll be eyeing this week are the JOLTS report, looking for corroboration to the January employment report, and the January retail sales report. The combination of the missed December retail sales report, along with last week's weaker-than-expected personal spending report and comments from Visa (V) and MasterCard (MA) over lack of big gas savings being spent, make retail sales the one to watch. Were the prior data a blip on the radar screen?
On the earnings front, 323 of the S&P 500 companies have reported their December quarter results. While the trend of beating expectations remains alive and overall earnings growth rate for the quarter is better than expected (roughly 3% vs. expectations of 1.7% in late January), it's far from vibrant. Sectors reporting higher earnings year over year include healthcare and telecom and, as we all know, the energy sector is delivering weaker earnings year over year. Blended top-line growth remains anemic at 1.6% for the quarter.
This brings us to our second point. With 60% of the S&P 500 weighing in so far, we remain concerned over the prospects of what is shaping up to be flat earnings growth for the S&P 500 for the first half of 2015, at a time when the index is trading at 16.9x expected 2015 earnings per share. That valuation multiple is head and shoulders above the five- and 10-year averages. Viewed another way, current expectations call for the S&P 500 to deliver earnings growth of all of 3.4% this year, less than half of last year's rate and marking the lowest level of growth since 2009.
If we look at historic year-end multiples for the S&P 500 over the 2001-2014 period and apply that to 2015 expectations -- for earnings or earnings growth -- it implies a potential top in the S&P 500 near 2055-2065. We'd also note the average earnings growth rate during the 2001-2014 period was 8%, according to FactSet, more than twice what's expected for 2015.
While we'll certainly listen closely to the 67 S&P 500 companies that are issuing quarterly results, the data collected so far is putting us in a more defensive position. Key reports to keep tabs on include those from Loews (L), Masco (MAS), Cerner (CERN), Coca-Cola (KO), Monster Worldwide (MWW), Sealed Air (SEE), Applied Materials (AMAT), Cisco Systems (CSCO), FireEye (FEYE), Tesla (TSLA), VF Corp. (VFC) and others.
In particular, food and related companies will be under the microscope, with Flowers Foods (FLO), Kellogg (K), Kraft Foods (KRFT), Pilgrim's Pride (PPC), Treehouse Foods (THS), WhiteWave Foods (WWAV), JM Smucker (SJM), Whole Foods (WFM) and Cheesecake Factory (CAKE). Comments from Chipotle (CMG) pointed to continued pain from higher beef prices and we expect similar comments to be had in the coming days, as well as insight on the benefit of lower grain (corn, soybean and wheat) prices.
Below is a more detailed look at what's coming in the week ahead. Be sure to check back midweek for our column, in which we will dish on the first half of the trading week and other key matters and thoughts, as well as how to play it all.