Fisher Investments Editorial Staff
US Economy, Market Cycles, Corporate Earnings, Globalization

The Fundamental Focus

By, 05/17/2010

Story Highlights:

  • Despite the massive European aid package, global stocks remain volatile.
  • Investors may be questioning the long-term viability of the euro—but an answer may not necessarily need to come right away.
  • Removing the risk of an impending member country default, the EU bought itself some time.
  • Fundamental economic strength should eventually reassert itself as the primary market driver—good news is pouring in from the US and globally.
  • Recent market volatility continues to display the hallmarks of a correction mentality—fear-based, not fundamental.

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A nearly $1 trillion European aid package, complete with European Central Bank (ECB) liquidity provisions, was announced last weekend. Led by markets on the Continent, global stocks bounced big Monday. PIIGS sovereign debt yields fell fast—their most dramatic decline since the crisis began. Yet the global gaze remained fixated on Europe and stocks wavered, finishing an overall good week on a sour note.

PIIGS yields were about as low Friday as they were on Monday, so it may not be PIIGS default worry knocking markets. As the euro took a beating along with equities, it may have more to do with concerns about long-term euro viability. Make no mistake, the question is still there—but an answer may not necessarily need to come right away. By removing the risk of an impending member country default, the EU bought itself some time.

Fundamental economic strength should eventually reassert itself as the primary market driver. Q1 eurozone GDP posted moderate but positive +0.2% quarterly growth, ahead of expectations and last quarter's 0.0% number. So far in Q2, indications are economic fundamentals remain strong in core European countries. And then there's the rest of the globe to consider. A slew of positive economic data was released throughout the week.

 Here in the US…

  • 459 S&P 500 companies have so far collectively reported 57% y/y first quarter earnings growth
  • 77% of the 459 firms beat analyst expectations
  •  Earnings were an aggregate 15% above analyst expectations—if it stands, the surprise factor would equal Q3 ‘09 as the highest since data began in 1994     
  • April industrial production beat expectations (+0.8% m/m, +5.2% y/y
  • April capacity utilization rose, but less than expected and is still below average, boding well for economic growth with moderate inflation
  • April retail sales beat expectations (+0.4% m/m, +8.8% y/y) for the seventh straight month
  • February and March retail sales were revised higher
  • March inventory/sales ratio hit a record low, demand continues to outstrip supply
  • Strong trade recovery continued, March exports grew 3.2% m/m, imports 3.1% m/m

 …and globally

  • UK March industrial and manufacturing production was the best in eight years, doubling expectations
  • Chinese April trade was strong, exports grew 30.5% y/y, imports grew 49.7% y/y
  • China April industrial production was up a blistering 17.8% y/y
  • China April retail sales jumped 18.5%, beating expectations
  • Hong Kong Q1 GDP added 8.2% y/y, 2.4% q/q 
  • Indonesia Q1 GDP grew 5.7% y/y, 1.9% q/q
  • Brazil March retail sales increased 15.7%, the fastest since data began in 2001
  • India March industrial production grew a double-digit 13.5% y/y 

Recent market volatility continues to display all the hallmarks of a correction mentality—fear-based, not fundamental. Such sharp market swings are always uncomfortable, but usually relatively short in duration. Fear simply can't overcome positive fundamentals for too long.

 

 

 

*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.

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