EmailThe stock market got on a roll yesterday, undaunted by the FOMC Minutes for the March meeting that showed more members are starting to lean toward a tapering of the Fed's asset purchase program by at least the end of the year. The market in our estimation showed the moxie it did because:
- Not many participants want the Fed to stop or to taper purchases without proof that improving economic conditions are sustainable. Therefore, when the time comes it will be against a backdrop of sustained economic improvement that bodes well for consumer and business spending, and earning prospects.
- The minutes are working toward reducing the element of surprise for market participants as it relates to future policy decisions.
- The March nonfarm payrolls report, out after the March FOMC meeting, does not fit with the tapering parameters maintained by Fed Chairman Bernanke, Vice Chairman Dudley, and Fed Governor Yellen who will continue to steer the policy directive.
Any way you look at it, the equity market showed little fear yesterday at the prospect of the Fed pulling back on its asset purchases. That could change in time, yet the bullish bias seen from the opening bell until the closing bell suggested the market either didn't believe the Fed will be tapering its asset purchase program anytime soon or that it can cope with such a move provided it occurs against a backdrop of an improving economy.
The end result of yesterday's trading was that the Dow and S&P 500 surged to new record highs on both an intraday and closing basis. There was the semblance of a "pain trade" behind yesterday's rally as the breakout to new highs, led by key leadership groups -- technology, financial, transports, and health care -- made it too painful for some participants, who have been waiting for the often called for correction, to watch from the sidelines any longer.
Paradoxically, such capitulation can often invite renewed selling interest as participants with lower cost-basis holdings look to take profits by selling stock to these late entrants. The first quarter earnings reporting season, which begins in earnest next week, could go a long way toward determining if that hand off takes place.
The market is indicated to open relatively flat this morning. Overnight gains in foreign markets and a better-than-expected initial claims report for the week ending April 6 have provided some support. However, an IDC report pointing to a 14% decline in first quarter PC shipments, a Goldman Sachs downgrade of Microsoft (MSFT) to Sell from Neutral, and some spotty same-store sales results for March have curtailed buying interest.
In terms of initial claims, they dropped by 42,000 to 346,000. That was better than the Briefing.com consensus estimate of 365,000. Our Chief Economist, Jeff Rosen, does not believe the improvement is a reflection of strengthening labor market conditions. Rather, it is most likely the effect of seasonal adjustment issues surrounding the Easter holiday evening out. Rosen thinks initial claims will firmly settle in the 330,000-350,000 range by the beginning of May.
Separately, continuing claims for the week ending March 30 dropped from an upwardly revised 3.091 mln (from 3.063 mln) to 3.079 mln (Briefing.com consensus 3.058 mln).
