Market Perspective for July 14, 2014

After the S&P 500 posted its largest weekly loss in three months, stocks look to rally this week. Performance will be largely dependent on a number of corporate earnings reports. Wells Fargo (WFC) released a solid report on Friday. JP Morgan (JPM), Bank of America (BAC) and Goldman Sachs (GS), among big financial institutions, will announce their performance figures, which will significantly impact the financial sector over the coming days. As we’ve noted before, the key will be the forward looking guidance as analysts are expecting the financial sector to boost S&P 500 earnings over the second half of the year.

General Electric (GE) reports this week, as does Google (GOOG), Intel (INTC), Johnson & Johnson (JNJ) among other blue chip companies. Thus far the majority of reports are beating analysts’ estimates for earnings and revenues.

Internationally, China will report its GDP number for the second quarter, though it is an artificial calculation and deserves to be discounted by investors. In contrast, the United States requires a full month to report the first estimate and needs three months to produce a final estimate. In April, the U.S. reported 0.1 percent growth, which ultimately fell to -2.9 percent by the time the final estimate was released. China, conveniently, is able to create its GDP number in less than three weeks with no subsequent estimates. Nevertheless, the number will provide a general gauge on the state of their economy. A strong or weak number will lead to buying or selling of financial assets around the globe. Estimates have the country growing at 7.4 percent year on year.

Moreover, domestic earnings reports should take the focus off of recent weakness in Europe, at least for the week. The past 6 trading days have seen shares battered due to problems at a Portuguese bank and underwhelming industrial production numbers. European shares were up on Monday, with the Euronext 100 up 0.74 percent, while the DAX gained 1.21 percent. We expect to see the rebound continue over the coming days.

The markets over the next month appear to have the momentum to continue to move higher. Improvement of the domestic economy is also supported by the recent announcement of the Federal Reserve that quantitative easing may end sooner than many expected. Assuming unemployment, inflation and economic growth stay on track, monetary injections will end in October. The Fed stated “If the economy progresses about as the Committee expects, warranting reductions in the pace of purchases at each upcoming meeting, this final reduction would occur following the October meeting.” There are only two intervening meetings before October: one at the end of July and one in mid-September. This is very good for the economy in the long-run, indicating increasing confidence by the Federal Reserve. Over the short-term, markets are likely to see increased volatility as investors become comfortable with elimination of government intervention.

Economic Reports: Besides China’s GDP, the country also reports foreign direct investment and real estate sales. In the United States, we’ll see industrial production, capacity utilization, retail sales, producer prices and housing starts for June.

Earnings: In addition to the firms listed above, Honeywell (HON), Abbot Labs (ABT), U.S. Bancorp (USB), Yum! Brands (YUM), Morgan Stanley (MS), CSX Corp (CSX), Yahoo (YHOO), Citigroup (C), and Ebay (EBAY) report.

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