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Buoyed by Yellen's words, earnings reports

Q1 earnings from 400 of S&P 500 firms beat estimates
Monday, February 17, 2014 - 06:00

LAST week, the stock market fought almost all the way back to par for the year as it was convinced by the new Federal Reserve chairman Janet Yellen that the US central bank was in safe hands under her charge.

According to an old adage, the market prefers bad news to uncertainty. Ms Yellen made no bones about her intention to continue "tapering" bond purchases. So while that's bad news, at least one uncertainty is removed - traders do not have to worry if quantitative easing is going to carry on, or not.

In testimony before the House of Representatives and the Senate last week, the Fed chief made crystal clear that she will pick up the baton from Ben Bernanke and keep up with the move to wind down the bond purchases.

She reassured markets that the Fed in her care will not be easily swayed by weak jobs reports. Admitting that she had not anticipated the surprisingly poor jobs growth in January and February, Ms Yellen warned against jumping to conclusions on the overall trend of jobs growth based on only two reports.

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Speaking at an event on Tuesday in Dallas, Fed regional president Richard Fisher said Ms Yellen had done a "great job". Mr Fisher said he and Ms Yellen had had differences of opinion in the past, but that she now spoke for him and the rest of the rate-setting Federal Open Market Committee.

"Her job is no longer to express her views, but to lead us as Ben Bernanke led us," Mr Fisher said.

Ms Yellen was also unfazed by the emerging markets crisis, echoing statements from Mr Fisher and others who have said the current scare is unlikely to lead to a repeat of the currency crises in the developing world in the 1990s.

"The big risk out there is if you really see a slowdown in the economy due to turmoil in international markets, or some major credit crisis that would constrain liquidity out there," said Eric Marshall, portfolio manager at mutual fund firm Hodges Capital. "I don't think that's likely; otherwise the Fed wouldn't be curtailing the QE programme."

Major indexes were also lifted by earnings reports that were by and large positive last week. Industrial companies such as farming machinery giant Deere & Co and building materials maker Owens Corning exceeded Wall Street growth targets.

This suggests that two vital parts of the economy - farming and construction - are shaping up for a big sprint.

"In general, you're seeing construction markets pick back up," said Mr Marshall of Hodges Capital. "If you look at companies that sell building wire, that sell cement, that sell gypsum or wall board - they're taking price increases here in January, February, March . . . right before construction season."

Another sign of construction activity and the jobs market picking up in the spring was the statement from home improvement chain Home Depot, which said the company will hire 80,000 workers ahead of its busiest season.

A substantial majority - nearly 400 - of the Standard & Poor's 500 which have reported first-quarter earnings have surpassed the average analyst's estimate.

There were a few major disappointments in this buoyant earnings season, however. WellCare Health Plans, an administrator of health insurance to the poor and the elderly, indicated fees linked to the new healthcare legislation had eaten into its profits.

Mr Fisher, of the Dallas Fed, reiterated his argument that the regulations passed by US Congress have done more to harm than to help the economic recovery in the last several years. Mr Fisher said his major worry as a central banker was not inflation but stagnated growth in middle-income jobs, something he believes is a direct result of fiscal policy.

Traders have also looked past some weak economic reports recently, working under the assumption that the stronger reports in November and early December were more accurate reflections of economic activity.

A historically bad winter brought more blizzards to the south and eastern seaboard of the US last week. On Saturday, city workers had just finished clearing roughly one foot of snow off the streets of New York City when it began to snow again.

The jobs report two weeks ago and the retail sales report last week, which showed an unexpected dip in January sales, both partly blamed the poor weather for their underperformance.

"I think investors should prepare themselves for slightly negative news or small misses in terms of economic data as a result of all the bad weather the country's experienced," said Oliver Pursche, president of Gary Goldberg Financial Services.

"But that's going to be very temporary. I would expect a jump in jobless claim, perhaps even a slight uptick in unemployment numbers in February," he added.

Such a blip should not be misinterpreted as a change in course, Mr Pursche said. He has little doubt that the recovery is picking up.

"You saw it in a rise in small business optimism; you see it in inventory-to-sales ratios . . . Just about every leading indicator is pointing to continued strength," Mr Pursche said.

For now, it seems likely that the Dow Jones Industrial Average will test the record set in January and settle around 16,600 points, or perhaps even hit 17,000.

But should the economy fail to bloom in spring, the recent optimism could melt away with the snow.

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