Stocks Still in a Sour Mood? - Ahead of Wall Street

Friday, May 16, 2014

Stocks appear to have started paying more attention to how the bond market is looking at the unfolding economic picture. The bond market hasn't been that impressed with recent economic numbers, with treasury yields steadily coming down. Hard to tell whether it's a fleeting phenomenon or something more enduring, but stocks have been in a sour mood the last couple of sessions and pre-open sentiment today indicates a continuation of that trend.

The global economic picture is far from clear. We saw the other day that Euro-zone economy barely grew in Q1 despite strong gains in Germany. What this means is that even a year after the end of recession in the region, there is hardly any growth outside of Germany.

The outlook for the U.S. economy is actually pretty good, with recent data indicating growth rebounding after the first quarter slump. But it increasingly appears that the growth rebound will likely be less robust relative to some of the more optimistic estimates in the market.

Retail Sales came in on the weak side, as did Industrial Production and the homebuilder sentiment index. What all of this means is that weather may not have been the sole restraint on the U.S. economy in Q1 – hard to tell what else may have been going on, but the housing sector clearly has lost its momentum.

Beyond the developed world, there are legitimate questions about the growth outlook for China and the other BRIC countries. Today's election of Narendra Modi as India's next prime minister has raised hopes about that country, but the country faces many structural problems and it's not expected to be smooth sailing. That said, investors are justified in feeling optimistic about India's prospects after the dysfunctional policies of the last few years.

On the earnings front, we got strong results from Nordstrom JWN and J.C. Penney JCP after the close on Thursday. The JCP report is particularly notable as this is the first real sign of life for this beleaguered department store chain.

What J.C. Penney went through over the last couple of years will likely remain a business school case study of what not to do with a department store after the company brought in Ron Johnson from Apple AAPL to turn it around. Mr. Johnson's changes proved too drastic for the company, causing a 25% drop in sales in the first year.

The resulting liquidity issues prompted many to doubt whether the company can survive. This quarterly release, which came after the company brought back its old management team, is pointing towards a steady revival. Given the tough operating environment, particularly for the mid-tier retailer, JCP's revival wouldn't be easy. But this report shows that it can happen.

Sheraz Mian
Director of Research

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