A
couple years ago and maybe even a couple months ago, a brutally bad
unemployment number would have sent the S&P 25 points lower, the Dow would
have been down 300 and the Nasdaq would have ended the day with a 2% loss. Flash forward to last Friday, when the
economy added a spellbinding 74,000 jobs.
That number would have been great if the average analyst expectation was
only 50,000. Instead, Friday’s
number came in about 125,000 SHORT!
That gave the stock market every reason to sell off…however the market
actually rallied? There’s 2
reasons for this and it’s not because they adjusted up the November jobs data
or because the almost useless unemployment rate dropped to 6.7% from 7%, and
it’s not because maybe the Fed won’t pull back on it’s bond buying as quickly
as expected. The reason the
overall market finished the week higher is because the unemployment data simply
doesn’t matter as much anymore as it has the last few years, and because in a
strong bull market, like the one we are in, bad news is easily shrugged off. There’s enough confidence that the Fed
will not ease to quickly and that the economy, despite that weak jobs number,
is still on track from strong growth.
If
jobs aren’t the driving factor for this market, what is? The answer is that 2014 will be a year
driven by corporate earnings.
Alcoa reported a disappointing quarter last week, which resulted in the
stock getting hit 5.5%. This will
be a common theme this year.
Stocks will be getting punished for missing earnings, and the ones that
surprise to the upside will be rewarded.
I want to stress that it’s more important for companies to report
stronger revenues than earnings, since EPS can be artificially increased through
share buybacks, and creative accounting (although EPS are still important). The only reasons revenues are growing
are because the company is doing well.
So, follow the revenues, pay attention to what management says about the
business environment and what forward guidance looks like.
Starting
on Tuesday, the big bank stocks will all be reporting earnings and I don’t see
any reason for those to be weaker than expected. I expect Wells Fargo, JPMorgan and Bank of America to all
say that lending has been strong despite a rise in interest rates. Goldman Sachs and Morgan Stanley should
report strong quarters because 2013 was a strong year for IPOs. If you are in the bank stocks, stay in
them through earnings. If you are
not in the financial sector, buy a small position now and wait for any of the
banks to miss and buy the rest of your position on weakness. My two favorites in the sector are Bank
of America and Goldman Sachs, both trading near 52-week highs.
While I fully expect the banks to report
strong quarters and continue their rally, I can’t say the same for some of the
high-flying stocks of 2013. If you
want to own stocks like Tesla, Facebook, Netflix, LinkedIn and even the
ridiculously over-valued Twitter, you need to wait until they report earnings
because with all of these stocks trading at P/Es well over 100 (including those
who haven’t even reported a single positive quarter of earnings growth), any
quarterly earnings miss (which I fully expect to happen to all of the above
except LinkedIn) will result in the stock getting slammed. I liked LinkedIn the best of the bunch
because as the economy improves, hiring picks up, and more and more users log
onto LinkedIn looking jobs. The
rest of the group should be sold.
Beside LinkedIn, the only momentum stocks that I continue to like are
the airlines like Southwest Airlines (LUV), United Airlines (UAL) and Delta
Airlines (DAL), and tech giants, Google (GOOG) and Amazon (AMZN). Lower gas prices and stronger consumer
spending will keep the airlines rolling in 2014, Google continues to innovate
almost better than any other company out there, and Amazon will continue to remain
the strongest retailer in the world, behind one of the best CEO’s in the world.
The
first week of the year wasn’t a strong one, but given the horrendous
unemployment number that investors shrugged off, as well as a whole slew of
bank stocks reporting what should be strong quarters, I expect the market to
trade higher, hitting new all-time highs by Thursday.
My current positions:
Long Ford (F), Emerging Markets ETF (EEM), Home Depot (HD), Toll Brothers
(TOL), Gilead Sciences (GILD), Whole foods (WFM), SunPower Corporation (SPWR), Starbucks
(SBUX) and Anadarko Petroleum (APC), and Visa (V).
Jeff Lewison
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