The overall favorable tone of the day’s news reports, both on the economic as well as earnings fronts, should help stocks maintain their positive momentum of recent days. On the economic front, we got better-than-expected Initial Jobless Claims numbers that reassuringly started going back down after unexpectedly rising last week. The housing number was on the softer side, but the CPI reading shows that inflation remains controlled and is not a problem. Headlines from Europe also remain helpful, with government bond yields continuing their recent downtrend.
The most important number from this morning’s economic data deluge was the 50K drop in weekly Initial Jobless Claims to 352K, taking this key number down to where it stood in April 2008. The four-week average dropped by 3.5K to 379K, maintaining its downtrend of recent weeks.
This key data series has experienced some wild swings in the last two weeks in both directions, likely reflecting seasonal distortions. But if we look beyond the last two weeks, it is unmistakably clear that claims are coming down. Continued favorable momentum on the labor market is the most important fundamental improving factor in the U.S. economy at present, which has the potential to put the recovery on a more sustainable trajectory.
On the earnings front, Bank of America (BAC) missed expectations, but not by a big margin as many had been fearing. Overall, this was a fairly reassuring report by the bank’s standards as it made progress in selling assets to strengthen its capital position and did not come out with big negative surprises in its mortgage business. Morgan Stanley’s (MS) results came ahead of expectations, though results in its institutional securities business that includes investment banking and trading were down significantly from the year-earlier level.
In other earnings news, UnitedHealth (UNH) beat EPS and revenue expectations and it reiterated its earlier 2012 guidance, which is in-line with current expectations. Railroad operator Union Pacific (UNP) came out with a strong EPS surprise on a modest revenue beat. Southwest Airlines (LUV) also came ahead of EPS expectations on in-line revenue numbers.
What stands out for me in the current reporting season is the extent of beaten down expectations. It appears that it does not take much to make the market happy with earnings performance this time around.
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