What The Market Wants: Uncertainty Reigns

Includes: AXP, GOOG, MCD, SLM
by: David Brown

The coming week should reduce uncertainty, at least slightly, since we get a bevy of new economic data and 15% of the S&P 500 reports. And maybe Spain will decide whether or not it needs help. Furthermore, we will have the next-to-last Presidential debate Tuesday night.

Monday, we pared last week's losses in half as the market responded well to Retail Sales, up 50% more than expected. And if you don't count auto sales, nearly double that number. Empire Manufacturing (-6.2) was better than last month's horrid -10.4. Finally, Business Inventories were up 0.6%, keeping pace with rising sales.

Even better, on the corporate front, Citigroup (NYSE:C) handily beat earnings estimates of $0.96 by posting $1.06. The trend continues for more companies to outperform expectations, but we still have at least two or three weeks of heavy earnings announcements.

With the day's domestic news and fairly positive behavior from both Asia and Europe overnight, the S&P 500 was up 11.5 points, or nearly 1%. The Dow Jones and Nasdaq were up nearly as much. Monday demonstrated that the market wants less uncertainty, as it always does.

Last week, uncertainty continued to rise on Spain's ambivalent attitude towards asking for help, serious problems in the Middle East, specifically Pakistan, and contentious domestic politics. Plans to undue last year's decisions to automatically roll back tax breaks and cut military spending were in disagreement even within the two parties. The best outcome of this year's election would be a breakup of the gridlock in Washington.

Here are the market stats.

Not surprisingly, the market fell to profit-taking last week as all style/caps and sectors fell 1-2%. But it wasn't all profit-taking, as there were elements of flight-to-safety. Mid-cap Value was down the least at -1.4%, and Mid-cap Growth was the worst, off -2.6%. The Technology sector fell more than -3%, and global concerns about growth surfaced, particularly in the Tech sector which sports higher valuations. Energy was down the least at -0.8%.

Before the week is over we will get Consumer Price Index, Industrial Production, Housing Starts and Building Permits, Initial Jobless Claims, the Philly Fed, and Existing Home Sales. Will this plethora of economic releases lower uncertainty? We will see. The week's heavy schedule of earnings releases should also play a role in "uncertainty' with four fairly important ones listed below.

American Express Company (NYSE:AXP) reports on Wednesday, and its EPS is expected to grow by 4.9%. Technically, it's consolidated into a tight trading range over the last four months and a breakout is likely. We favor the Financial sector looking forward and its health will likely help carry AXP up following an earnings beat or miss.

SLM Corporation (NYSE:SLM) is another Financial reporting on Wednesday. It's widely expected to beat earnings by 50%. And considering it specializes in the student loan business, we feel comfortable recommending it, no matter the outcome of the election.

Next is Google Inc. (NASDAQ:GOOG), reporting on Thursday. The Technology sector has been battered a bit recently, and GOOG has retreated from its nearly +30% run-up in the last three months. It's expected to beat earnings by 8.9%. While we like its fundamental valuation and its diversified business, we are cautious over the litigation it faces from the FTC.

Finally, McDonald's Corp. (NYSE:MCD) reports on Friday. It's expected to grow EPS by 2%, not out of the ordinary for a strong company. However, 40% of its sales come from Europe, and it faces increasing competition from other fast-food business. If you're considering entering a position in MCD, we recommend waiting until after earnings to see how much Europe has affected it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it. I have no business relationship with any company whose stock is mentioned in this article.