Earnings Roller Coaster Leads to Flat Week

in Market Commentary by

Market Digest – Week Ending 4/25

Mostly positive earnings announcements early in the week drove stocks higher through Wednesday. But increased tension in Ukraine and continued selling pressure on richly valued internet and health care stocks reversed the pattern and left major indexes relatively flat for the week. International and small cap stocks finished down. In earnings news, Netflix, Apple, Facebook, Comcast and Harley Davidson were among notable winners while McDonalds and Amazon disappointed. Bonds and gold were up modestly.

Weekly Returns:

S&P 500: 1,863 (-0.1%)
FTSE All-World ex-US: (-0.6%)
US 10 Year Treasury Yield: 2.67% (-0.05%)
Gold: $1,303 (+0.6%)
USD/EUR: $1.383 (+0.1%)

Major Events:   

  • Monday – New assets added to hedge funds in Q1 was reported at $26 billion, helping push total hedge fund assets to an all-time high of $2.7 trillion.
  • Monday – Netflix announced stronger than expected subscriber numbers and said it would raise prices for new subscribers.
  • Tuesday – The Supreme Court on Tuesday upheld Michigan’s decision to end affirmative action at its public universities.
  • Tuesday – Valeant and activist investor William Ackman unveiled a $46 billion offer for Allergan.
  • Wednesday – The Commerce Department said sales of single family homes dropped 14.5 percent to a seasonally adjusted annual rate of 384,000 units.
  • Wednesday – Apple announced stronger than expected sales and profits, boosted its dividend, and announced a 7-1 stock split. Shares rose.
  • Thursday – Amazon reported a 23% jump in revenues, but very little profit as costs continue to run high. Shares fell.
  • Friday – President Obama spoke with four other world leaders about a new round of sanctions on Russia. Sanctions are expected to be targeted at specific companies and individuals and not the broad economy.
  • Friday – Pro-Russian militants in Ukraine took a group of military observers hostages, increasing tensions.

Our take:

One of the key drivers of the slow but steady US economic recovery has been the housing market. It helped that following 2009, there was nowhere to go but up. Home prices remain strong, but recent data has confirmed the volume of transactions is slowing and falling short of expectations. This is important because home sales have a strong ripple effect in the economy. Banks, materials companies, and retail chains are just a few of the major beneficiaries.

Home re-financings have also dried up. Mortgage rates remain low, but they have been low for so long most people who could refinance already have. Re-financings create activity and give homeowners the equivalent of an instant salary raise. Most of this is usually spent, driving more economic activity. Some of the slack is being picked up by an increase in home equity loans, which are up about 25% from a year ago. But this is still well below the peak in 2007. Borrowing from home equity is not necessarily a good long term solution, but a certain amount of it among the population is healthy to keep the economy growing.

The economy should continue to grow, but it could lose a strong tailwind if more people don’t start buying homes.

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Craig Birk, CFP®

Craig Birk, CFP®

Craig Birk is a member of the Personal Capital Advisors Investment Committee. He also serves as Vice President of Portfolio Management. Prior to Personal Capital Advisors, he was an integral leader within the portfolio management team at Fisher Investments. During Craig’s time there, the company increased assets under management from $1.5 billion under management to over $40 billion. His responsibilities included risk management, portfolio implementation oversight, and management of all securities and capital markets research analysts. Mr. Birk graduated from the University of California at San Diego and has earned the Certified Financial Planner® designation.

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