Friday, April 8, 2011

Stocks have understandably remained in a wait-and-see mode in recent days ahead of the start of the first quarter earnings season next week. I expect this trend to remain in place today as well. 

Some may attribute the market’s tentativeness to the ongoing budget battle in the nation’s capital that could lead to a government shutdown later today. But I beg to disagree. A shutdown does not mean that everything the government does will come to a stand-still. 

All ‘essential’ services will remain in place; the troops will be paid, Social Security checks will continue to go out, and even the unemployment payments will likely be unaffected. It is basically an inefficient and wasteful way of doing things. But that’s how Washington operates even in the best of  times. 

While I wouldn’t discount the possibility of a last-minute resolution today, a partial government shutdown, if it comes to that, is not as economically consequential an event as the media headlines would imply.  

The earnings season, on the other hand, is a big deal for the market. And it makes perfect sense for the market to wait for it before making its next move. 

The recent surge in commodity prices, disaster in Japan, and unrest in the Middle East has raised questions about the sustainability of the earnings momentum that has been a hallmark of this recovery. I am confident that the overall trend in the aggregate will remain unaffected by these headwinds, though I wouldn’t discount above-average negative surprises in some sectors. 

But more than positive earnings surprises, stocks will be looking for clear and unequivocal pronouncements from management teams about the coming quarters. This will be the catalyst that will push stocks to new highs in the coming weeks. But in the meantime, the best we can do is to wait and not be distracted by all the noise around us.  

Sheraz Mian
Director of Research
 
Zacks Investment Research