MarketView for April 21

Summary

The major equity indexes advanced modestly on Monday in subdued trading as investors showed hesitation in the wake of a strong rally last week and before many key earnings releases scheduled for this week.

Monday's gain marked the S&P 500's fifth straight climb, its longest winning streak since last October. The S&P 500 wrapped up its best week since July last week, due in no small part to the results from such names as General Electric and Morgan Stanley. The Nasdaq also scored its fifth straight gain on Monday.

Of the 87 companies in the S&P 500 that had reported results through Monday morning, 62.1 percent have exceeded earnings expectations, according to Thomson Reuters data, compared with the 66 percent average over the past four quarters. On the revenue side, 51.7 percent have exceeded forecasts, below the 54 percent average over the past four quarters.

S&P 500 companies' first-quarter earnings are projected to have increased 0.8 percent from a year ago, Thomson Reuters data showed. The forecast is down sharply from the start of the year, when profit growth was estimated at 6.5 percent.

Halliburton added 3.3 percent to close at $62.92 after the company reported earnings that exceeded expectations and the company released a strong guidance going forward.

SunTrust gained 1.5 percent to $38.51 after its results. Hasbro rose 1.9 percent to close at $55.66 after its earnings beat expectations, though revenue was under forecasts.

After the closing bell, Netflix reported higher earnings for the quarter that ended in March, partially due to the addition of 2.25 million customers to its movie and TV streaming service in the United States. The company’s shares rose 6.8 percent to $372 in extended-hours trading. After a jump of 300 percent in 2013, Netflix had slumped recently on concerns that the stock may be overvalued.

Dozens of S&P 500 compani9es will report earnings this week, including such closely watched companies as Apple, Biogen Idec and Facebook. A number of Dow components, including McDonald's, AT&T, Procter & Gamble and Caterpillar will also report results. At the same time, more than 30 companies in the Nasdaq 100 are scheduled to report earnings, according to the Nasdaq. The Nasdaq 100 represents more than half of the index's weight.

Britain's Sunday Times reported that Pfizer had approached AstraZeneca to propose a $101 billion takeover, an offer that was rejected. However, Astra's cancer drug pipeline is still considered a draw for Pfizer. Pfizer rose 2 percent to $30.86 while AstraZeneca climbed 8.8 percent to end the day at $69.10.

Talks between Barrick Gold and Newmont Mining regarding a potential merger have hit a snag, but the companies remain keen to reach a deal and discussions are likely to resume. Newmont's stock rose 6.4 percent to $25.05. It was the S&P 500's largest percentage gainer. Barrick fell 3.9 percent to close at $17.28.

Volume was light, with about 4.34 billion shares changing hands on the major equity exchanges, well below the 6.83 billion average number of shares so far this month, according to data from BATS Global Markets. Some market participants were away on Monday to observe Passover.

Leading Economic Indicators Exceed Consensus

A gauge of future economic activity was higher in March, pointing to a pick-up in growth in the months ahead. According to the Conference Board, its Leading Economic Index rose 0.8 percent in March, the most in four months, and above the consensus of 0.7 percent. Six of its ten components made positive contributions, led by the interest rate spread and the average workweek in manufacturing.

The six-month rate of change edged down slightly to 2.7 percent from 3.0 percent, but the six-month diffusion index rose to 70 percent from 60 percent, indicating widespread strength among individual indicators. This is historically consistent with above-trend economic growth.

On a year over year basis, the LEI is up 6.1 percent, the most since July 2011, and well above the average gain per annum of 2.3 percent, which indicates strong upward momentum.

The Coincident Index edged up 0.2 percent, while the Lagging Index increased 0.6 percent. The Composite Leading Index rose 2.2 percent from a year ago, the fastest pace since September 2011, which suggests stronger economic growth over the next six months.

The Conference Board also noted "the current expansion in economic activity should continue, with upside potential in coming months."

Rate of Unemployment Continues in Reliability

The unemployment rate in recent years has been a worthy gauge of slack in the economy, according to a paper published Monday by the Federal Reserve Bank of San Francisco that takes aim at critics who have argued otherwise.

According got the papers authors, the unemployment rate has responded to GDP growth since the financial crisis in essentially the same way that it has in every recession since the 1970s, specifically rising when economic output slows and falling when it speeds up.

"The unemployment rate remains a good summary measure of overall economic slack," wrote Mary Daly, No. 2 in the San Francisco Fed's research department, and John Fernald, a senior research advisor at the San Francisco Fed, in the latest issue of the bank's Economic Letter.

Determining the exact extent of slack in the economy is one of the most pressing questions for monetary policymakers, Fed Chair Janet Yellen has said.

If policymakers underestimate it, they might miss the chance to give the economy the extra juice it needs. If they overestimate it, they could end up over-stimulating the economy and sparking inflation. And, as policymakers including Yellen have noted throughout the recession, the unemployment rate has given confusing signals.

Indeed, its behavior after the Great Recession appeared to fly in the face of well-established economic theory, known as Okun's Law after Arthur Okun, who in 1962 showed that a two-percentage-point drop in GDP growth generally leads to a one-percentage point increase in the unemployment rate.

That relationship appeared to fail after the financial crisis, with the jobless rate initially rising much faster than the law would have predicted, and more recently falling much more rapidly than the rule would anticipate.

That roller coaster experience convinced more than a few economists that something had shifted fundamentally in the economy. Therefore, the Fed has shifted away from using the unemployment rate as its main read on economic health, turning instead to a broader basket of labor market indicators to gauge weakness.

However, in the paper published Monday, Daly and Fernald showed that much of the apparent disconnect between the jobless rate and GDP growth can be traced to incomplete real-time economic data and temporary deviations from Okun's Law that occur during many recessions.

Revised GDP data suggest the long-standing relationship between the jobless rate and output remains intact, they wrote. "Our findings suggest that Okun's law is working about the same as it always has," they wrote.