Traders work on the floor of the New York Stock Exchange Wednesday, March 16The Associated Press
Anyone who blinked missed the buying opportunity brought on by the cavalcade of global crises this month.
Markets needed only a week to recover from the Japanese earthquake and the resulting nuclear crisis, both of which were layered on top of the civil war in Libya and protests raging in North Africa and the Middle East. Even some market bulls are shaking their heads at this resilience, especially as the global mayhem struck at a time of stratospheric commodity prices, a worsening European sovereign debt fiasco and rising inflation in China.
"Since the start of 2011, it's almost as if the four horsemen of the apocalypse rode into town to threaten the global economic recovery," says Bank of Montreal economist Douglas Porter.
In his mind, investors have boiled events down to one key issue: corporate earnings. The profitability of U.S. businesses hit a record high last quarter, amounting to about 11 per cent of GDP compared with a long-running average of about 9 per cent.
First-quarter earnings season begins in two weeks in the U.S. and investors are anticipating even stronger profits ahead. Reuters' quarterly poll of almost 400 market analysts and economists points to all 18 major stock indexes finishing the year above present levels. Hong Kong's Hang Seng index is expected to rise more than 17 per cent, while the S&P 500 is seen gaining 8 per cent. Not to be outdone are France's CAC 40 (9 per cent) and Germany's DAX (13 per cent or more).
This positive sentiment is all the more interesting given that the survey was released last week, just as Portugal's government collapsed over the unpopular issue of implementing economic austerity measures, all but assuring that the country will join Greece and Ireland on the ignominious EU bailout list.
The ratings agencies Standard & Poor's and Fitch Ratings both slashed their ratings on Portugal's sovereign debt by two notches last Thursday, and they warned that further downgrades could follow.
Spain's financial mess is sure to come under greater scrutiny now that Portugal is teetering. With an economy more than six times the size of Portugal's, Spain will certainly make a louder thud in the markets if it follows its neighbour down.
In North America, macro economic data have taken a recent turn for the worst. While employment figures have shown very slight gains, durable goods orders, industrial production and consumer confidence have fallen short of expectations.
U.S. data on personal income and spending will be released on Monday, and a report on consumer confidence on Tuesday. Both may show that rising prices are hitting households hard, according to Paul Ashworth, chief U.S. economist at Capital Economics. But Friday employment data are expected to show an improving trend, with non-farm payrolls expected to increase by 190,000. And the ISM manufacturing survey on Friday is forecast to stay very close to its recent plateau.
David Rosenberg, chief economist and strategist at Gluskin Sheff + Associates Inc., questions the widely held perception that macro economic data is strong enough to support rising stock valuations. He notes that three important economic indicators over the past month surpassed consensus estimates while 12 fell short - not an encouraging trend this far into an economic recovery.
"Perhaps a bit of a reality check is in order when the ratio of economic surprises to the downside exceed those to the upside by a factor of four in the span of a month at a time when the major averages go back to retest the highs," he wrote in his Friday note to clients.