AFTER over a month of watching Capitol Hill and Pennsylvania Avenue, Wall Street can get back to what it knows best: Wall Street.
The first full week of earnings season is dominated by the financial sector – big investment banks and commercial banks – just as retail investors, free from the fiscal cliff worries, have started to get back into the markets.
Equities have risen in the new year, rallying after the initial resolution of the fiscal cliff in Washington on 2 January. The S&P 500 on Friday closed its second straight week of gains, leaving it just fractionally off a five-year closing high hit on Thursday.
An array of financial companies – including Goldman Sachs and JPMorgan Chase – will report on Wednesday. Bank of America and Citigroup will join on Thursday.
“The banks have a read on the economy, on the health of consumers, on the health of demand,” said Quincy Krosby of Prudential Financial in New Jersey.
“What we’re looking for is demand. Demand from small business owners, from consumers.”
Investors were greeted with a slightly better-than-anticipated first week of earnings, but expectations were low and just a few companies reported results.
Fourth quarter earnings and revenues for S&P 500 companies are both expected to have grown by 1.9 per cent in the past quarter, according to Thomson Reuters.
Few large corporations have reported, with Wells Fargo the first bank out of the gate on Friday, posting a record profit. The bank, however, made fewer mortgage loans than in the third quarter and its shares were down 0.8 per cent for the day.
The KBW bank index, a gauge of US bank stocks, is up about 30 per cent from a low hit in June, rising in six of the last eight months, including January.
Investors will continue to watch earnings on Friday, as General Electric will round out the week after Intel’s report on Thursday.
This week will also feature the release of a wide range of economic data.
Tomorrow will see the release of retail sales numbers and the Empire State manufacturing index, followed by CPI data on Wednesday.
Investors and analysts will also focus on the housing starts numbers and the Philadelphia Federal Reserve factory activity index on Thursday. The Thomson Reuters/University of Michigan consumer sentiment numbers are due on Friday.
Jim Paulsen, chief investment officer at Wells Capital Management in Minneapolis, said he expected to see housing numbers continue to climb.
“They won’t be that surprising if they’re good, they’ll be rather eye-catching if they’re not good,” he said. “The underlying drive of the markets, I think, is economic data. That’s been the catalyst.”
Worries about the protracted fiscal cliff negotiations drove the markets in the weeks before the ultimate 2 January resolution, but fear of the debt ceiling fight has yet to command investors’ attention to the same extent.
The agreement was likely part of the reason for a rebound in flows to stocks. US-based stock mutual funds gained $7.53bn after the cliff resolution in the week ending 9 January, the most in a week since May 2001, according to Thomson Reuters.
Markets are unlikely to move on debt ceiling news unless prominent lawmakers signal that they are taking a surprising position in the debate. The deal in Washington to avert the cliff set up another debt battle, which will play out in coming months alongside spending debates.
The CBOE Volatility index, a gauge of traders’ anxiety, is off more than 25 per cent so far this month and it recently hit its lowest since June 2007, before the recession began.