Last Sunday, we predicted that this week would be the calm before the storm, and that was pretty much the case. Fueled by the minutes from the Fed's last meeting, the stock market continued its upward move this week, closing up 1.6% to 2.2%. The year-to-date view shows the S&P 500 up some 2.1%, which means it closed Friday trading at 17.5x expected 2015 earnings.
We chalk it up to those minutes showing a divide among FOMC members on when to raise interest rates. Even after all the missed economic data we've talked about over the last few weeks, it's still surprising to learn that some of those officials continued to see the need for an interest rate hike around the June time frame.
The desire to raise rates in June became even more of a head scratcher in light of the fact that the Atlanta Federal Reserve just lowered its growth estimates for the first quarter from 1.9% two months ago to 0.1%, which we shared with you last Wednesday. Perhaps the abysmal March employment report took those same officials back to school so they could freshen up on their basic economic courses. Barring any sharp rebound in inflation, we continue to see the first Fed rate hike toward the end of this year at the earliest.
Outside the U.S. markets, one of the big winners was iShares FTSE/Xinhua China 25 Index ETF (FXI), which closed last week up 11%. We first turned bullish on the shares back in November and are pleased to see them up now more than 28% including dividends as of last night's close. We monitor the slowing vector of the Chinese economy by keeping tabs on the country's PMI data, and recommended FXI shares on the expectation the government would act like many other countries faced with flailing growth -- by stimulating their economy. The most recent reading of the March data showed China's manufacturing contracted during the month, and to us that confirmed our thesis.
According to a new report from Bloomberg Intelligence, demand for steel and other metals in China is falling and conversations with executives reinforced the "gloomy" outlook, another positive note for our FXI investment thesis. However, given the sharp rise in FXI shares, we now face the question, "What if China's stimulative efforts fall short of Wall Street expectations?" We've seen that before and it's never a good thing. And by the way, FXI shares are now wildly overbought.
Putting it all together, we believe the risk-to-reward tradeoff is now skewed too far to the risk side. While we may miss some upside, we find it hard to complain about a 28% return in a little over four months, particularly with an ETF. Ring the register on your FXI shares and add the available cash to your war chest as we set sail for March quarter earnings. For those wondering, we remain bullish on iShares Europe ETF (IEV).
Turning to the week ahead, it's a pretty even matchup between economic data and corporate earnings. Remember that over the last several weeks, we've had a smattering of economic data that fell short of expectations and subsequently earnings expectations were scaled back. From an economic perspective, we kick off with March retail sales and PPI data, then segue into several manufacturing data points before getting the Fed's April Beige Book report on Wednesday. Rounding out the week is the March housing starts report and the Philly Fed Index.
From our perspective, the three reports to watch this week will be retail sales, the Beige Book and housing starts, particularly single-family starts. Retail sales have come up short the last few months, and without Easter in March we're not expecting any big improvement. Single-family housing starts fell from a high of 725,000 in December to 593,000 in February, the lowest level for the prior nine months. With one of the coldest Marches we've seen in some time, we're expecting a modest pickup, but again nothing spectacular. Given the sharp rise in Toll Brothers (TOL), Lennar (LEN) and other homebuilding stocks since mid-December, a weak report could take those stocks down a peg or two.
After the dozens of weaker-than-forecast economic data points, we're laser-focused on the April Fed Beige Book for signs that either all is still the same -- not good news -- or for signs the economy is starting to spark. Candidly, given the weak manufacturing order data and the horrific March employment report, we're not holding our breath.
Making its semi-annual appearance, the International Monetary Fund (IMF) is expected to issue an outlook on the global economy ahead of spring meetings with the World Bank next week. If you've followed the IMF's report card on the global economy like we have, you're probably less than impressed with its track record. Much like several Fed members and their view on the domestic economy, the IMF tends to have an overly optimistic perspective when it comes to the global economy, and just like the Fed, that view tends to be revised lower as time goes on. We expect more of the same this week.
We've shared our concerns over the March quarter earnings season, and while so far we've had "eh" earnings from Alcoa (AA) and Walgreen Boots Alliance (WBA), the rubber will really start to hit the road this week. If we had to finger one company report that caught investors off guard, it was Citrix Systems (CTXS). In a pre-announcement of its quarterly results, Citrix acknowledged internal issues (restructuring and field channel changes) but also said, "The increase in foreign exchange volatility impacted results and customer-buying behavior to a larger extent than anticipated in the quarter." Heading into this earnings season, we've had our eyes wide open about the potential for dollar-related damage, but now we have to be open to it being far greater and more widespread than even we first thought.
The lion's share of earnings will be from financial companies -- Bank of America (BAC), Citigroup (C), Wells Fargo (WFC), JPMorgan Chase (JPM), PNC Financial Services (PNC), Goldman Sachs (GS) and others. Let's remember that many of these are both commercial banks and investment banks, with the latter benefiting from the robust M&A market that continued in 1Q 2015. Fee and market share leaders for that activity included Goldman Sachs, JPMorgan and Morgan Stanley (MS). Outside of the banks, we'll hear from American Express (AXP), Blackstone Group (BX), BlackRock (BLK) and Synchrony Financial (SYF).
Interspersed throughout all of these financial earnings, Intel (INTC), Google (GOOGL), Netflix (NFLX), Taiwan Semiconductor (TSM), and Sensient Technologies (SXT) will be reporting this week. Late last week, IDC published its view that PC sales continued to struggle in Q1 2015, falling 6.7% from a year ago compared to a 2.4% decline in Q4. IDC also reported price pressure, meaning the fall in revenue could be even greater. We'd continue to avoid shares of HP (HPQ) and Lenovo (LNVGY).
Given issues with PCs, particularly desktop models, it will be interesting to hear anything new on Intel's plans to diversify into mobile and other markets. Similarly, Google's challenges in the Eurozone as well as hints to its upcoming I/O conference will be what we're listening to above and beyond monetization metrics. With Netflix, it's more and more about the capital it has to fund its proprietary content plans as well as any new content announcements.
Rounding out the first real week of earnings, we've also got paint companies Sherwin Williams (SHW) and PPG Industries (PPG), and that means focusing on TiO2 given recent price increases in China, Europe and the Middle East. Finally, on the industrial front, we've got both General Electric (GE) and Honeywell (HON) closing out the week. Based on the global manufacturing order data in recent months, it looks like things could be a little bumpy for these two.
Below is a more detailed look at what's coming in the week ahead. Be sure to check back for our midweek 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.
|Economic Calendar: Monday, April 13 - Friday, April 17|
|14-Apr||Retail Sales ex-auto|
|14-Apr||NFIB Small Business Optimism Index|
|15-Apr||MBA Mortgage Index|
|15-Apr||Atlanta Fed Business Inflation Expectations|
|15-Apr||NAHB Housing Market Index|
|15-Apr||Fed's Beige Book|
|15-Apr||Net Long-Term TIC Flows|
|16-Apr||Natural Gas Inventories|
|Earnings Calendar: Monday, April 13 - Friday, April 17|
|Monday, April 13|
|JBHT||Hunt (jb) Trans|
|MTB||M&t Bank Corp|
|PBY||Pep Boys M M &j|
|Tuesday, April 14|
|JNJ||Johnson & Johns|
|Wednesday, April 15|
|ASML||Asml Holding Nv|
|BAC||Bank Of Amer Cp|
|DAL||Delta Air Lines|
|GOOGL||Google Inc-cl A|
|NE||Noble Corp Plc|
|NSR||Neustar Inc -a|
|PNC||Pnc Finl Svc Cp|
|WSO.B||Watsco Inc-cl B|
|Thursday, April 16|
|AXP||Amer Express Co|
|GS||Goldman Sachs G..|
|GWW||Grainger W W|
|PBCT||Peoples Utd Fin|
|PPG||Ppg Inds Inc|
|Friday, April 17|