Last Week’s Market Recap
Last week the market was back to a full five days of trading, after two consecutive shortened weeks for the Christmas and New Year’s holidays. All three of the most popular indices moved further into positive territory for the year, the NASDAQ again was the best performer of the week, and is already up more than 3.50% for the year.
In a return to normality, last week was absent of any real political discussions which influenced the stock market. Since the fiscal cliff was resolved on New Year’s Day, investors have been able to turn their attention to Q4 earnings reports which began last week. Earnings season for Q4 kicked off last week with 30 of the 500 S&P 500 companies reporting.
Wells Fargo (WFC) was the company that we were most interested in following last week, since it provided the first look into the banking industry. As mentioned in last week’s newsletter, Wells Fargo is the largest home mortgage lender in the country, the largest bank based on market capitalization, and also the second largest bank when measured by deposits (JP Morgan is no. 1). All of these factors add up to being an important company to hear from when it comes to earnings reports.[table "99" not found /]
Although the S&P 500 was only higher by 0.38% last week, the closing price of 1,472 marked the best closing price for the broad based index in more than 5 years. The S&P 500 is now higher by more than 3% for the year, and within a few percentage points of the all-time closing high of 1,561, which was set in October of 2007, just before the financial collapse of 2008 which resulted in a massive market selloff.
Bank Earnings in the Spotlight
As we enter the second week of earnings season, the focus will be on the banking and financial industry. This week there are 34 companies which are components of the S&P 500 reporting earnings, a majority of them are large banks and financial institutions.
The earnings action begins on Wednesday morning when U.S. Bank (USB) and JP Morgan (JPM) report their Q4 results before the opening bell. We’ll also hear from Goldman Sachs (GS) and Northern Trust (NTRS) as the morning unfolds. These large banks are all hoping to follow in the footsteps of Wells Fargo who posted record earnings last week.
Investors are going to continue to focus on bank earnings reports this week, and listen for signs of strength in our slowly recovering economy. Since large banks work closely with the small businesses and consumers in America, they provide a look into the health of the economy which might otherwise be difficult to see.[table "101" not found /]
Another company that we are following this week is Johnson Controls (JCI). The Milwaukee, WI based company is expected to earn $0.51 per share when they announce their earnings results on Friday morning.
A major part of Johnson Controls business is derived from the sale of automotive products, and is expected to benefit from the recovery in the automotive industry. Recently the stock has seen upward price movement, and as of Friday’s close was within reach of it’s 52-week high. On Friday, shares were priced at $31.67, and offered investors a 2.40% dividend yield.
This Week’s Economic Data
Economic data this week is going to be focused on the PPI and CPI readings for December. To better understand the meaning of each of these terms, the actual definition provided by the US Department of Labor is listed below for each.
The PPI, or producer price index, as defined by the Bureau of Labor Statistics: “The Producer Price Index (PPI) program measures the average change over time in the selling prices received by domestic producers for their output. The prices included in the PPI are from the first commercial transaction for many products and some services.”
The Bureau’s definition of CPI is: “The Consumer Price Indexes (CPI) program produces monthly data on changes in the prices paid by urban consumers for a representative basket of goods and services.”[table "100" not found /]
While looking at each of the readings independent of each other might give us an idea of the level of inflation within two different parts of the economy, looking at both of them side-by-side is one tool used to help us understand the health of the economy.
Alan Creech, Chief Investment Officer of Cedar Creek Securities, Inc. explained the dynamic between the two readings by saying “In a healthy economy, the CPI should outpace the PPI. Meaning that the consumer is stronger, and the producers have the ability to pass their costs onto the end consumer.”
“In a healthy economy, the CPI should outpace the PPI. Meaning that the consumer is stronger, and the producers have the ability to pass their costs onto the end consumer.”
As the economic data is released this week, we will keep our readers updated by sending out the actual PPI and CPI readings via Twitter @CDR_CRK_SEC. Also, as we have in the past, if any of the economic data being released is materially different than expected, or if there should be a meaningful reaction in the market based on the data, we will report back next week with greater detail and further explanations.
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