Week in Review, April 30

U.S. stocks gained as strong earnings overcame lingering fears about slower economic growth here and abroad. With over 250 S&P 500 companies reporting, more than 3/4 have beaten expectations. EPS are around +10% YoY.

The S&P 500 was up +1.8% for the week and +12.3% year to date. Ten year Treasury bond yields reached 2.38% in mid-March but have since declined every week to 1.94% on Friday.

Apple does it again. Earnings of $12.30 a share outpaced Wall Street's consensus estimate of $10.04. Apple sold 35.1 million iPhones, topping the 30 million anticipated by analysts.

As expected, the Federal Reserve met and kept interest rates at rock bottom levels and affirmed their intention to keep them there through late 2014. They noted "some signs of improvement" in the housing area and that inflation "had picked up somewhat." Financial strains in Europe have risen again after a brief hiatus.

I noted a few things from Ben Bernanke's quarterly press conference last Wednesday:

He said: "The question is, does it make sense to actively seek a higher inflation rate in order to achieve a slightly increased pace of reduction in the unemployment rate. The view of the committee is that that would be reckless." That's reassuring.

The U.S. is not like Japan in the 1990s because their bubble was way bigger and they had a deflation problem, which the U.S. doesn't. We also fixed our banks quicker.

He believes that the high unemployment rate is cyclical, not secular, so there is slack in the labor markets and further easy policy won't give rise to higher wage demands.

He said he won't hesitate to support the economy with more easing if necessary. (The bar for QE3 may be lower than we think?)

Real GDP in the first quarter rose +2.2%, somewhat less than expected. Government spending fell -3%, and GDP ex government was +2.8%. The GDP deflator climbed +1.5%, again less than expected.

Housing indicators out last week were mixed with March new home sales down -7.1% to 328,000 units. But YoY sales of new homes rose +7.5%. The Case-Shiller home price index edged up +0.15% in February and is down -3.3% YoY. No one home price index is perfect. For example the FHFA index was up slightly YoY. Most analysts seem to believe housing has found a floor.

The focus for the week will be the employment data out Friday. It looks like warm weather has pushed job growth higher in January and February (around +260,000 jobs per month) only to be followed by softer numbers in March (+120,000). Analysts expect +175,000 job gains for April and the unemployment rate to stay at 8.2%.

Greece parliamentary elections and the French Presidential election will conclude on May 6. In France, if the socialist candidate Hollande defeats incumbent Sarkozy (that's what the polls show) expect some market fireworks.

Jeff Pantages

Chief Investment Officer