Despite Washington Budget Crisis, Earnings Will Lift Stocks

by Louis Navellier | July 19, 2011 12:13 pm

Despite the contentious federal debt ceiling debate and the end of the Fed’s Quantitative Easing last month, yields on Treasury securities have fallen this month. In fact, PIMCO, the world’s largest bond manager, has actually increased its holdings of U.S. government debt. Stocks fell 2% last week but they have risen 4% in the last three weeks. With earnings season reaching a peak by late July, we could see a strong summer stock rally, despite all the frustrating political debates in Washington, DC.

Last week, the stock market recovered a bit late in the week, mostly responding to three favorable price indexes:

  1. On Wednesday, the Labor Department announced that the prices for imported goods declined in June by 0.5%, the first decline in a year. This decline was mostly due to lower crude oil prices.
  2. On Thursday, the Labor Department reported that the Producer Price Index (PPI) declined 0.4% in June, while the “core” rate (excluding food and energy), rose 0.3%.
  3. Then on Friday, the Labor Department reported that the Consumer Price Index (CPI) fell by 0.2% in June, even though the core rate rose 0.3%.

In summary, underlying (core) inflation is rising moderately while lower food and energy prices bring the overall price indexes down. Still, these very low rates of price changes are basically good for the market.

The other economic news last week was mostly positive: On Thursday, the Commerce Department said that June retail sales rose 0.1%, but this was significantly better than economists’ consensus expectation of a 0.2% decline. Excluding gasoline, retail sales rose 0.3%, implying that overall consumer spending was steady. Vehicle sales rose by a more robust 0.8% in June, so consumers are finally buying more big ticket items, a clear sign that consumer confidence is slowly improving. And on Friday, we learned that industrial production rose 0.2% in June, so economic growth continues, but at a maddeningly slow rate.

The best economic news last week was that China’s official GDP growth came in at a 9.5% annual pace in the second quarter, down only slightly from a 9.7% rate in the first quarter. This is good news, since it shows that the pessimists’ fears about China “slowing down” are unfounded. In addition, on Tuesday, the Bank of Japan turned out a surprisingly upbeat report, which bodes well for Asian and global growth.

In conclusion, despite all the political distractions, Wall Street remains focused on earnings and mergers. Google (NASDAQ:GOOG[1]) and its blowout earnings on Thursday helped to improve investor sentiment, as did Carl Icahn’s bid for Clorox (NYSE:CLX[2]) on Friday.

The global economy is humming along nicely and U.S. economic growth should improve in the second half. Since the stock market reflects private sector profits, not government sector debts, all of the news about rising global interest rates, credit agency downgrades in Greece, Italy, Ireland (and maybe the U.S.) should not impact second quarter corporate sales and earnings announcements. This week, we will see a series of major tech-stock earnings reports, so technology stocks could rally soonest.

  1. GOOG:
  2. CLX:

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