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The Markets This Week

April 18, 2016 | Weekly Commentary

A rally in bank shares and reassuring news about China’s economy helped push the major U.S. stock indexes up about 2% last week. Trading volume was moderate, and market breadth, which measures rising issues minus decliners, hit an all-time high.

Financial stocks rose 4% on the week, abetted by the release of better-than-expected first-quarter earnings reports from JPMorgan Chase and other major banks. Nevertheless, the sector remains the worst performer on the year, down 4%.

The Dow Jones Industrial Average rose 321 points, or 1.8%, for the week, to 17,897.46. The Standard & Poor’s 500 index tacked on 33 to 2080.73. The NASDAQ gained 1.8%, to 4938.22.

China’s statistics bureau said first-quarter gross domestic product expanded 6.7%, down from 6.8% in the fourth quarter, but higher than investors had feared. The country’s March retail sales and industrial output both rose.

“China’s a focus for a lot of investors,” says Jason Pride, director of investment strategy at Glenmede Investment and Wealth Management. After the market’s February freak-out about the Middle Kingdom drove stocks down, the most recent data showed some economic stabilization and eased worries, he notes.

Factors that had previously hurt the market were absent. There wasn’t a lot of back and forth chatter from Federal Reserve officials last week about the pace of interest-rate hikes. That contributed to a lessening of anxiety about the Fed’s intentions, says Pride. Investors were also braced by flat to higher energy prices. U.S. hydrocarbon production and inventories are dropping, which could lead to higher oil prices. U.S. bank first-quarter results were better than expected, and among investors, “less bad is good,” says Pride.

Investors care more about figures that are “better or worse than expected” than about results that are absolutely good or bad, says Liz Ann Sonders, chief investment strategist at Charles Schwab.

The market knows it’s going to be a tough first-quarter earnings-reports season, with S&P 500 profits expected to fall by about 9%, or 4% excluding energy companies.

“What will be more important is the commentary given by corporate managements” about current and future conditions, says Terri Spath, chief investment officer of Sierra Investment Management. If companies don’t shave guidance, even lower earnings could be a support for share prices.

Better breadth bodes well for the rally. Unlike the stock rallies seen last September and November, this one is “much better looking” breadthwise, according to Sonders. “There is a greater participation by a broader number of stocks.”

Spath notes that “90% percent of stocks are above their 200-day moving average.”

Still, this move probably won’t be sustainable without an eventual return to profit growth by Corporate America. First and second quarter S&P 500 earnings are expected to be negative, but perhaps “the market is sniffing out a rise in the second half,” Sonders says.

The S&P 500 hasn’t made a new high since last May. But with the NYSE daily cumulative advance-decline line at a new high, things are looking brighter for the bull.

(Source: Barrons Online)

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