Why we’re still market bears

By Markets Covestor

The earnings season kicked off in April, with many of the major mega-cap firms releasing weak earnings or forecasts.

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Alphabet, formerly known as Google (GOOG), which normally reports stellar earnings, surprisingly missed earnings and revenue expectations.

Apple (APPL) plunged 14% in April after reporting Q1 revenue of $50.6 billion, down 12.8% year-over-year and over $1 billion below analyst expectations.

 

 

Tech Pain

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Apple’s guidance for the third quarter was also below expectations – revenue between $41 billion and $43 billion vs. $47.3 billion.

Microsoft (MSFT), another tech giant, also missed earnings expectations at $0.62 earnings per share vs. $0.64 expected while issuing poor guidance for the following quarter.

These three major tech companies dragged down the NASDAQ for the month.

 

Earnings Recession                   

As of May 6, 2016, 87% of companies in the S&P 500 have reported Q1 2016 earnings.

Out of the 79 companies who have issued Q2 2016 forecasts as of May 1, nearly 70% have issued negative EPS guidance and only 30% of companies have issued positive EPS guidance.

The 12-month P/E ratio remains elevated above 5-year and 10-year averages at 16.5.

 

Central Banks                  

The European Central Bank kept quantitative easing unchanged in the month of April, which left the markets unfazed as investors were expecting the ECB to hold steady.

However, the Bank of Japan surprised markets when it kept fiscal policy steady, when investors were expecting more stimulus.

However, U.S. equity markets remained relatively unaffected. On April 27, 2016, the Fed unsurprisingly announced that they would keep interest rates unchanged.

In my opinion, the statement had a hawkish undertone and deliberately omitted previous language about the global economy continuing to pose risks.

 

Fed Action

The Fed also stated that the domestic economy and inflation are improving and that it will likely raise rates at a gradual pace.

This seemed to leave room for a rate hike at their next meeting in June, which would allow them to achieve the one or two additional rate hikes this year as planned before it starts getting close to the Presidential election, which, in our opinion, is likely to cause volatility in the markets in the fall.

                   

Oil Bears

Surprisingly, oil continued its meteoric rise from March, rising nearly 20% in April. Despite a failure to reach a product-freeze agreement at the OPEC and non-OPEC meeting in Doha on April 17, 2016 as we expected, oil continued to rise through the month.

We still believe that the rise in oil prices is not being driven by fundamentals but is likely a technical rebound after hitting lows in the mid-20s back in February.

Supply glut remains as OPEC refuses to curtail production and demand has not risen to meet supply. Therefore, we still remain bearish on oil and believe this current rally is temporary.

                

Outlook              

We are still bearish in our outlook for the market, as these rallies seem to be short lived and often not driven by fundamentals.

The global economy still remains weak and interest rates low, so we are seeing investors seek U.S. equity more out of default than actual superior fundamentals.

The next opportunity for the Fed to raise rates is in June, which, in our opinion,is likely to happen in order for them to raise rates at least once before it starts getting close to the Presidential Election.

We think this will certainly have an impact on the market. We will continue to monitor the markets closely and adjust our portfolios accordingly.
 
Photo Credit: Denali National Park and Preserve via Flickr Creative Commons








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