Wall Street Sinks As Strong Dollar Hits Earnings

Wall Street Sinks As Strong Dollar Hits Earnings

The US financial markets have been hit from all sides today.

Wall Street Sinks As Strong Dollar Hits Earnings
Wall Street Sinks As Strong Dollar Hits Earnings

Winter storms are battering the east coast, big hitters in the Dow Jones are disappointing with quarterly earnings and an unexpected drop in orders for durable goods are among the adverse events that are undermining investor sentiment. It’s certainly an eventful day for the Fed to kick off their latest FOMC meeting.

The bad news was enough for the Dow Jones to sink as low as 17,288.3 at one point (a drop of 390 points), though by early afternoon it had bounced off those lows to 17,390, down 289 points or 1.64%. The S&P 500 shed 0.90% to stand at 2038.6.

Perhaps the most worrying development was the lackluster showing on the corporate earnings front. Microsoft ($MSFT) reported after the market closed on Tuesday and what it had to say wasn’t bad, but it was not received well by the market. Earnings were in line with expectations at 71 cents per share, down from 78 cents a share in the comparative period a year ago, on revenue of $26.47 billion (just ahead of expectations), but investors appear to have focussed on lower hardware sales and a drop in its key Windows business, and this has seen the share price punished in trading today. Shares in the company plunged 8.5%.

The story with Caterpillar ($CAT) was decidedly worse, the heavy machinery maker failing by some margin to meet estimates for earnings and also slashing its revenue outlook for 2015 on account of the stronger dollar. Shares in Caterpillar fell 7.5%. Fellow Dow Jones component Procter & Gamble ($PG) told a similar story of global income being hit by the strength of the dollar, as it missed analyst estimates for both earnings and revenue.
It is this common thread of US corporates that are global players with broad global revenues struggling with currency devaluations that may bear an influence on the Fed in its FOMC discussions today and tomorrow; it will be hard for the Fed to raise interest rates when the dollar is already this strong.
Heavy snows have fallen in the northeast, though the end result turned out to be not as dire as had been forecast. The precautionary travel ban put in place in New York City has been lifted, but it does mean that trading volumes have been lighter than normal, which could well have played a part in the magnitude of the day’s price movements and it raises an interesting question about how the stock market might behave when normality returns following the weather scare.

Macroeconomic news was mixed, with weakness in durable goods orders reported alongside a big jump in consumer confidence and home sales. Durable goods orders fell 3.4% in December, confounding expectations that had pointed to a 0.7% gain. Excluding the notoriously volatile component of transportation, orders shrank 0.8%, following a 1.3% decline at the core level in the prior month.

The Conference Board’s Consumer Confidence Index is up to 102.9 this month, a steep gain from December’s 93.1 reading. Not only was this far above expectations, but also the highest level recorded post-recession. All things being equal, we would expect improvements in consumer confidence to translate eventually into increased consumer spending, a major component of US GDP growth.

New home sales grew to an annualized rate of 481,000 last month, up from 431,000 in November, a result that easily exceeds expectations. We have seen a series of upbeat housing reports very recently, suggesting the housing market may at long last be springing to life once more.

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