The S&P 500 is at an all-time high. Mutual funds have underperformed the market and managers are buying stocks before the end of the quarter (window dressing). This is the last day they can do that (T+3) and the market should grind higher today.
China’s market was down 2.3% overnight and that is a little concerning. Recent tightening by the PBOC and new government real estate restrictions have investors spooked. The flash PMI was better than expected last week and the official release (Sunday night) should be consistent with stable economic growth.
Banks in Cyprus reopened today and this wrinkle should be ironed out in a few days. Italy’s political issues will be resolved in a few weeks and European credit concerns will remain low. Portugal, Ireland and Spain are on the mend and Moody’s affirmed their bond rating for Portugal. The last two years, European credit concerns have flared up in May and that pattern has not been forgotten.
For now, US stocks still have upside as earnings season approaches. Asset Managers have been waiting for a 5% pullback and they haven’t gotten one. With each passing day they will get more anxious.
This morning, Chicago PMI missed expectations and initial claims increased by 17,000. This was not the news we were looking for, but it is not too damaging. The big releases are slated for next week. Official PMI’s, ISM manufacturing/services, ADP, initial claims, and the Unemployment Report will be released. The news should be market friendly and I expect to see gradual economic growth.
Earnings season starts April 8th and the results should be good. Revenues will be flat and profit margins will be healthy. Cash flows will reach record levels and corporate balance sheets are as strong as ever. Any uptick in demand will go straight to the bottom line.
Bond yields on 10-Year US Treasuries are lower than the dividend yield on the S&P 500. Asset Managers will rotate into equities. At a forward P/E of 14, stocks are attractively valued.
The market is making a new all-time high. Gradually add to May call positions. This breakout will gain traction as earnings season approaches and I believe the market still has gas left in the tank.