This year’s perennially aloft stock market finally took a tumble last week after Fed Chairman Ben Bernanke hinted at tapering the massive bond purchase program (aka QE3) designed to hold down long-term interest rates and stimulate economic growth.  The financial markets reacted violently and sent shudders worldwide.  Some notable statistics:

Not surprisingly too, the shoot-up in rates, which has the potential to derail the entire economy, hit housing stocks and REITs disproportionately hard.

This week: Some back-steps

Clarification by Fed officials this week (notably William Dudley of the New York Federal Reserve) has calmed roiling markets, and the US stock market has still marked double digit returns for 2013 – not bad for six months.  From my perspective, the media’s and pundits’ handwringing obscures the potential positives of Fed speak.

From a positive viewpoint, the Fed is communicating that it stands ready to gradually slow bond purchases so that interest rates normalize when:

  1. Unemployment has receded to lower levels
  2. The economy is on a self sustaining trajectory

What comes next? A focus on company earnings and what to look for

Next week marks the end of the second quarter and the beginning of company reporting season.  From a stock investors’ perspective, these are the things to look for:

  • While revenues are expected to be flat (reflecting slow spending somewhat due to the effects of sequestration muting demand), the focus on expanding margins, productivity and bottom-line profits will be key.  I would also pay attention to company guidance by large bellwether companies. What are the business challenges and opportunities on their minds? 
  • The slowdown in China and other parts of the world has lowered the cost of raw materials for large manufacturers.  In addition to the US consumer, who comprises almost 70% of the US economy, my attention is focused on manufacturing.  What are the comments from CEOs of industrial companies regarding their customers, costs, productivity etc.? 
  • Sector performanceSo far this year more defensive sectors of the economy have outperformed including Healthcare up almost 20%, Consumer Discretionary up more than 16% , and Technology up more than 12%.  The laggards have been Materials down almost 9%, Energy up 1% and Utilities at 7%.  For the last quarter, leadership has stayed somewhat the same but with Financials being in the top three leaders (along with Health Care and Consumer Discretionary.)  I would pay attention to any upcoming changes in sector leadership.

More about earnings…

Check back for more commentary about sector performance as the earning seasons progresses.  www.thehuffmanbroadsheet.com will keep you posted on important topics to consider for your investing going forward.

 

 


[1] “Stocks sink 2.1% on Fed pronouncement” by Vito Racanelli in Barron’s, June 24, 2013

 

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