April, which is historically a strong month for the stock market, ended up being a rocky one. All the major indices were down more than 4% by the end of the month.
And it has left many investors wondering if they should follow the old adage “Sell in May and go away”.
As I explained in Saturday’s Market 360, I don’t think so.
In fact, those who did have missed out on an incredible month so far. The S&P 500 is up about 3.6%, while the Dow and NASDAQ are up more than 4%.
The reason for the comeback is pretty simple: earnings.
92% of S&P 500 companies have reported results from the latest quarter. Of those, 78% exceeded analysts’ earnings estimates. The average earnings surprise has been by 7.5%. As a result, the S&P 500 is now expected to achieve 5.4% average earnings growth in the first quarter. That’s up from estimates for 3.4% at the end of the first quarter.
This renewed attention on earnings is exactly what we needed, folks. The fact is there really weren’t any big economic reports to distract investors from what has been a solid first-quarter earnings season.
This week, however, is a different story. The fact is we have a slew of economic data coming out, and all eyes will be on the inflation reports this week. Here’s a brief look at what’s on deck…
Producer Price Index (PPI)
This morning, the latest Producer Price Index (PPI) was announced, and wholesale goods prices continued to rise. Headline PPI increased 0.5% in April and was up 2.2% in the past 12 months. Core PPI, which excludes food, energy and trade, climbed 0.4% last month and was up 3.1% in the past 12 months.
The April PPI was substantially higher than economists’ consensus estimate for a 0.3% rise in headline PPI and a 0.2% increase in core PPI. But while this reading looks bad on the surface, the details are actually pretty good.
For example, wholesale service costs rose only 0.1% in April. Goods prices rose 0.4%, even though they declined 0.2% in March.
Energy was the primary culprit for the rise in wholesale goods prices last month, as wholesale gasoline prices soared 5.4%. Without energy inflation, goods prices would only have gone up by 0.1%.
Also worth noting is that March’s headline PPI number was revised lower, from an initial reading of a 0.2% increase to a decrease of 0.1%. That was a surprise, and it’s good news.
Consumer Price Index (CPI)
On Wednesday, the Consumer Price Index (CPI) will be reported, and expectations call for a 0.4% increase. All eyes will be primarily focused on owners’ equivalent rent, or shelter costs, and it will be interesting to see if there’s been any relief on this front.
Personally, the energy components of both the PPI and CPI have caught my attention in recent months. Prices at the pump remain elevated, and as I noted, wholesale gasoline prices jumped 5.4% in April. In comparison, gasoline jumped 1.7% in March in the CPI energy component. Since energy remains a primary inflation catalyst, there is little the Federal Reserve can do to bring inflation down since energy prices are largely inelastic.
U.S. Retail Sales
Finally, we will also get a look at U.S. retail sales for April on Wednesday. Economists expect retail sales to grow 0.5% in April, compared to 0.7% in March.
Frankly, it’s going to be fascinating to see what’s going on with consumers. Recent data shows that consumer confidence has plunged.
It’s an interesting dynamic because the employment numbers are good, and wages are rising. However, many consumers are worried about food and energy costs, which remain greatly elevated from a couple of years ago.
Plus, to be quite frank with you, we have a two-tier economy right now. If you’re a Baby Boomer, you’re probably a homeowner and you probably own stocks. You’re most likely prospering. However, your kids are likely struggling, and they’re really frustrated. That’s a problem that bears watching, and we will have to see if this impacts how much people are spending.
This Week’s Ratings Changes
The bottom line is that this week will be an important one for Wall Street. Investors want to know whether inflation remains sticky or not. If it’s declining a little faster than it has recently, then that could further fuel hopes that the Federal Reserve will cut key interest rates a couple of times this year.
The reality is the Fed is basically dealing with bad data right now, and that makes this week’s reports all the more important. As such, the market is likely to respond strongly to either positive or negative news.
So, as we await this key inflation and economic data, I went ahead and took a fresh look at the latest institutional buying pressure and each company’s financial health and revised my Portfolio Grader for 83 big blue chips. Of these 83 stocks, 16 were downgraded from a B-rating (Buy) to a C-rating (Hold), and 17 stocks were downgraded from a C-rating to a D-rating (Sell).
I’ve listed the first 10 stocks rated as a Sell below, but you can find the full list – including the stocks’ Fundamental and Quantitative Grades – here. Chances are that you have at least one of these stocks in your portfolio, so you may want to give this list a skim and adjust accordingly.
| Ticker | Company Name | Total Grade |
|---|---|---|
| ALC | Alcon AG | D |
| AMT | American Tower Corporation | D |
| BBDO | Banco Bradesco S.A. Sponsored ADR | D |
| CRL | Charles River Laboratories International, Inc. | D |
| CSGP | CoStar Group, Inc. | D |
| DT | Dynatrace, Inc. | D |
| EBR | Centrais Eletricas Brasileiras SA-Eletrobas Sponsored ADR | D |
| FSLR | First Solar, Inc. | D |
| FTNT | Fortinet, Inc. | D |
| HD | Home Depot, Inc. | D |
Now, I want you to prosper in the market no matter what happens with the inflation data and the Federal Reserve. And to do that, you need to own fundamentally superior stocks with growing institutional buying pressure. These are the stocks that are most likely to post wave-after-wave of positive earnings surprises and soar higher regardless of whether the Fed cuts rates or not.
And you’ll want to avoid the stocks that don’t – like the ones in the list above.
So, if you’re looking for fundamentally superior companies, i.e., stocks with strong earnings and sales growth, then I strongly encourage you to check out my Accelerated Profits service.
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Sincerely,
Louis Navellier
Editor, Market 360
