Stock Market Prepares For Corporate Earnings This Week Amid Concerns Of A Market Correction

graphU.S. equities fell sharply in trading on Friday after the U.S. Labor Department reported that the U.S. economy added 192,000 nonfarm payroll jobs to the economy in March, slightly missing the consensus estimate of 200,000 while the unemployment rate held steady at 6.7 percent.

Job growth has averaged 183,000 per month over the prior 12 months.

The S&P 500 briefly touched an all time record of 1,897 in intraday trading on Friday before plunging 1.25 percent for the day.

The Dow momentarily reached its all time high before nose-diving .96 percent.

Momentum stocks such as Tesla and Netflix fell hard in trading on Friday along with social media darling Facebook whose shares have been in a downward trend since a 52-week of 72 was reached in early March.

Investors are questioning if a market correction is unfolding with all time highs in still relative close proximity which comes on the heels of profitable stock index gains of between 25-30 percent in 2013 while the Federal Reserve’s quantitative easing program was in full gear with the central bank purchasing monthly bonds at a pace of $85 billion per month, helping to drive long-term interest rates lower and indirectly providing more liquidity to U.S. stock markets and emerging economies.

In 2014 the Federal Reserve has gradually started to taper their quantitative easing program by $10 billion per month as U.S. economic data shows steady signs of improvement and calls grow louder for a return to normalization with the Fed’s monetary policies from hawkish Fed Committee members.

The Fed’s quantitative easing program is now $30 billion lower from 2013 and is scheduled to be reduced to $55 billion a month in April.

Most economists believe that the central bank will continue to unwind the Fed’s quantitative easing program in 2014 through its tapering of $10 billion per month.

Lately investors have been paying closer attention to remarks from Fed Chair Janet Yellen regarding the Fed’s monetary policy with short-term interest rates.

Since the end of 2008 the Federal Reserve has kept overnight rates near zero.

The Fed has pledged to not raise short-term rates or tighten monetary policy until the U.S. unemployment level dropped to 6.5 percent.

In March the unemployment rate was 6.7 percent which is quite close to the Fed’s target of 6.5 percent.

When responding to questions at the Fed’s March press conference about the timetable for interest rate hikes, Yellen said that the Fed’s 6.5 percent unemployment threshold was ending and would be replaced with “qualitative guidance” that the central bank would consider beyond simply the unemployment rate.

Yellen explained that the Fed would keep interest rates low for a “considerable time” after quantitative easing ends at the end of 2014.

Yellen was questioned  by a reporter about the length of time between the end of quantitative easing in 2014 and the first rate hike.

She replied, “It’s hard to define but, you know, probably means something on the order of around six months.”

Based on Yellen’s “six month timetable”, the first rate hike will arrive  in mid-spring around April 2015, although most investors were projecting late 2015 or 2016.

Since Yellen’s March press conference, she has sounded more dovish than ever and appears to be throwing cold water on her more hawkish press conference remarks which rattled some investors.

While speaking at a conference in Chicago on March 31st, Yellen maintained there is “considerable slack” in the economy and the labor market but fell short of retracting her “six month timetable.”

Yellen said that the economy will need Fed stimulus for “some time” despite its decision to begin winding down its quantitative easing bond buying program.

“I think this extraordinary commitment is still needed and will be for some time, and I believe that view is widely shared by my fellow policymakers at the Fed,” Yellen said at the conference.

Yellen maintained that the Fed hasn’t done enough to settle the unemployment situation and economic conditions continue to warrant accommodative monetary policy.

The Fed is projecting a slightly lower GDP for 2014 compared to their last projection from December based on calculations from the fourth quarter of last year to the fourth quarter of this year.

Change in real GDP is projected to be 2.8 to 3.0 percent in 2014, down from their earlier projection of 2.8 to 3.2 percent in December.

Week Ahead

Earning season begins this week with Alcoa reporting on April 9th and JP Morgan Chase on April 11th.

Factset Research Systems estimates that corporate earnings for companies in the S&P 500 will be down 1.2 percent in the first quarter of 2014 with the majority of companies with forecasts now show a negative outlook and lower guidance.

-Johnathan Schweitzer

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About Johnathan Schweitzer 1468 Articles
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