Craig Peckham is a managing director, equity trading strategist, and global equity product manager at Jefferies & Co. Previously he was a vice president at Bear Stearns. His comments have been published in American Banker, Barron’s, Bloomberg, Dow Jones, The New York Times, and The Wall Street Journal, and he appears on Bloomberg Television, CNBC, CNN, Fox Business News, and PBS. [Editor's note: The original image has been replaced with the correct image of Craig Peckham.]
H.L.: What does the stock market’s recent volatile movements tell you?
C.P.: I think what you see here in general for the U.S. equity markets is an interesting tug of war between the domestic U.S. corporate profit machine and the sovereign debt situation in Europe, and specifically Greece.
Corporations are continuing to surprise to the upside by virtue of the fact that the outlooks we’re getting and results that we’re getting from major companies are attracting better than expectations. For example we had an impressive set of results from Best Buy (NYSE:BBY). On the same day we saw an increased outlook for Qualcomm (NASDAQ:QCOM), and it was just two weeks ago that we saw Boeing (NYSE:BA) accelerate its production schedule for the 777 and 747 aircraft families.
I highlight those three companies, because I thing they represent an interesting cross-section of the U.S. economy from industrial goods to technology to consumer retail.
H.L.: What about sovereign debt?
C.P.: The force pulling in the opposite direction -- the volatility surrounding the sovereign debt situation -- is relatively far flung. The ebb and flow of that situation has definitely found its way into the sentiment for U.S. stocks. It has had an outsized impact on risk tolerance in the marketplace, so on days when the risk profile for European sovereign debt appears to worsen there’s been a tendency to pull back from other risk assets as well, including the U.S. equity market.
The additional variable that’s come into play was the message being delivered from the bond market where we have seen three auctions of new Treasury debt that have been met with relatively poor demand. In turn that’s put upward pressure on interest rates, and I think the bond market is effectively saying, “No mas” to a perceived lack of fiscal restraint, exacerbated by the passage of the health care bill.
H.L.: Then why hasn't the stock market reacted negatively to the health reform law?
C.P.: It hasn’t worked its way into the equity market to this point, and that tells us two things: First, the substantial sell-offs in longer-term rates last week still leave us at extraordinarily low interest rates by any historical measure. In addition, asset allocators seem to see relatively more attractive value in equities as an asset class than necessarily in the fixed income markets.
H.L.: So what is the reality here? Are up coming earnings reports the key?
C.P.: The reality continues to center on the corporate profit outlook in the U.S. The upcoming earnings season is absolutely key, because when it’s all said and done, the level of corporate profitability in corporate America trumps most other factors in determining where stocks go from here.
H.L.: What’s your prediction?
C.P.: What I expect to see is a story quite similar to what we saw in the December quarter earnings season. That is a continued high frequency of positive earnings surprises and potentially more optimistic outlooks for the rest of the year. I say that because coming out of the December quarter earnings, companies’ visibility on the full-year 2010 was not as good as it is now.
But before we get to earnings season we need to digest the all-important March jobs report coming this Friday.
H.L.: What do you expect for jobs?
C.P.: We’ve seen that the expectations for new jobs in the month of March has been edging steadily higher in recent weeks, and I think this expectation makes sense. While the February non-farm payroll data showed a still-contracting job market, there were meaningful weather-related effects, which depressed those results. As we look out to March, the combination of an absence of weather effects, substantial Census Bureau hiring, and what we think is improving underlying demand for labor could make March the biggest month of job growth since the first quarter of 2007.
To the extent that this signals a more consistent path of job creation, the equity market should receive it favorably, as we settle into a path of high-quality economic growth and subdued short-term interest rates.
H.L.: How much of an effect on the economy is the continuing housing problem?
C.P.: There are a couple of missing links so far in the economic recovery. The first is the still-high level of unemployment, which we expect to improve as soon as the job report on Friday. But housing fundamentals could continue to be more sluggish to rebound. It’s an important consideration, particularly for the banking sector, but the banks’ ability to raise private capital and replenish balance sheets is helping to mitigate the stubborn softness in the housing market.
There are other important data sets, which in fact suggest that we’ve returned to an environment of home value appreciation.
H.L.: What’s your assessment of the economy over the next few years?
C.P.: My best guess for the shape of this economic recovery is that we will see a sharp increase in corporate profits by virtue of the fact that companies cut costs so aggressively during the downturn that profits can snap back very quickly even in the face of relatively modest revenue rebounds. But after we progress through this early phase of the recovery, it’s reasonable to expect that growth rates may settle into a more modest range.
We’ll get the benefit of relatively sharp improvement in economic activity in the first half of this year, but then we’ll settle into a much more modest rate of growth with those more modest growth rates the product of a deleveraging economy. Consumers will allocate more of their income to debt paydown and less to spending and corporations will be less inclined to add debt to their balance sheets than they were in the years leading up to 2007.
Disclosure: No positions