You probably wouldn’t have guessed that today’s headlines—a $5.8 billion bad trade by JPMorgan, China reporting continued slowing GDP growth, and an "unlucky" Friday the 13th date—would lead to a 200-point rally in the Dow.
But that’s exactly what happened, and I think that although it doesn’t necessarily make much sense on the surface, the recent six-day losing streak for the market is bringing bargain hunters back into the market because they know earnings season is here and the tide is in favor of growth stocks.
Let’s take a look at the two big news items of the day:
First, shares of JPMorgan Chase (JPM) climbed about 5% after the bank reported better-than-expected results despite its big trading loss. The company has also sacked managers tied to the bad trade and plans to make three executives in charge of the unit pay back a portion of their compensation over the last two years—an action that’s appropriately called a "claw back."
But none of this means that the bank is off the hot seat—let me reiterate that I absolutely do not recommend buying financial stocks. I’m an ex-banking analyst and I simply don’t trust them. There are plenty more skeletons in the big financials’ closets.
Next, traders breathed a sigh of relief at the news from China, which announced 7.6% annual GDP growth in the second quarter, down from an 8.1% annual pace in the first quarter.
So while this was the slowest GDP growth rate in over three years, the GDP report was a pleasant surprise, as some market pundits were expecting sub-7% GDP growth. Also encouraging was that retail sales in China rose 13.7% in June and industrial production rose 9.5% in June, so there is no evidence of any rapid deceleration in China’s economic activity—a big worry from market commentators.
Even more importantly, we’re seeing strong buying pressure behind stocks that come out with good earnings. This signals to me that the overall stock market is oversold and that we should expect that earnings surprises will be rewarded.
I’m expecting plenty of twists and turns this earnings season, as although analysts are warning of the first decline in quarterly earnings since 2009, those same security analysts are also more bullish than ever before on U.S. stocks—a full half of the stocks on the S&P 500 Index have more buy ratings than sells and holds, a record since Bloomberg began collecting this data 12 years ago.
The reality is that despite the expected weakness in the second quarter, full-year earnings are still expected to reach a record high this year, and U.S. stocks are deeply undervalued, currently about 15% below the average valuation levels of the last 60 years.
Have a great weekend,