The economic releases showed improvement in Europe and the U.S.. Nonetheless valuation concerns pulled equity prices lower. In a flight to safety bond yields fell across the globe. Credit spreads were wider for the riskier sectors. The U.S. dollar was weaker and commodity prices were higher on the week.

Perspective:

The economic indicators have shown improvement. The Euro-zone has weathered its sovereign debt storm; Greece was able to issue new bonds. The U.S. has weathered its winter vortex storms with but-a-pause in its recovery. Emerging countries have slowed their growth, but are still growing. So, why have the equity markets traded off so dramatically this quarter. It is not the "economy, stupid." It probably is valuation. While the economy slowed in the first quarter, corporate earnings and the corresponding guidance may have taken a bigger hit.

Factset projects that the S&P 500 will report a -1.6% year-over-year decline in earnings the first quarter. One caveat, this is the fourth time in the last 12 quarters that negative earnings were projected; yet, only one of those quarters concluded the quarter with negative reported earnings for the S&P 500 companies. Upside surprises have added 3.1 percentage points to initial projections; companies like to manage earnings in ways report upside surprises.

P/E ratios on the overall market are not badly out of line with the long term average of 15 times earnings. Birinyi Associates report that the S&P is selling at 17.61 times historic earnings, but 15.44 times projected earnings for the next 12 months. A year ago the S&P 500 was selling at at 18.6 multiple. The biggest recent stock market declines were in technology sector stocks. The Tech-heavy Nasdaq 100 was selling at 17.65 times (a discount to the S&P 500) a year ago; now, even after the recent sell-off, the Nasdaq is selling at an 20.65 multiple of past earnings and 18.01 times future earnings.

So, the fact that the economy is improving may not be sufficient to boost stocks if the valuations are high. Valuations can be improved by 1) falling stock prices, 2) rising earnings projections, or 3) upside surprises. On a personal note, the Davidson family is expecting an upside surprise in the birth of our first grandchild, Ella, who is due Wednesday.

Economic Releases:

In the U.S., Initial Claims for Unemployment benefits fell to 32,000 to 300,000 in the week of April 5. This was the largest one-week drop in more than a decade. The four-week average of Claims (blue in the chart) fell to 316,250. The chart shows that this measure was close to the pre-Great Recession level experienced in 2007. Continuing Claims (red in the chart), and which are reported on a one-week lag fell 62,000 to 2.774 million.

Other Economic Releases

In the U.S., Producer Price Index for Final Demand rose +0.5% in March; less food and energy PPI rose +0.6%; both measures were higher than the range of expectations, but the year-over-year increase in PPI was only 1.4%. The Reuters/University of Michigan Consumer Sentiment index for April rose more than two points to 82.6.

Industrial Production in Germany rose +0.4%; in France IP rose only +0.1% in February. In the UK IP for Input rose +0.9% while IP for Output rose +1.0%. The Bank of England met and, as expected, maintained rates at 0.50% and asset purchases at 375 billion pounds.

The Bank of Japan also met and left interest rates and asset purchases unchanged. China produced a $7.71 billion Merchandise Trade Surplus in March as imports fell more than exports; a deficit was expected; some believe that this was a sign of weakness in the Chinese economy.

Equities Markets:

A sell-off in technology and concerns about earnings led stocks lower again this week. Only the Hang Seng posted positive returns on the week. Most markets were down QTD and YTD after this second week of the sell-off.

Bond Markets:

Government Bond yields were lower across the globe this week. Investment grade corporate spreads were a basis point narrower, but emerging and high yield spreads were wider. Nonetheless, credit markets were higher on the week with the lower interest rates.

Currencies & Commodities:

The U.S. dollar fell against the other four currencies in the table. Note: the quoted values are not the way currencies are conventionally quoted. The table values are quoted in ways that the number is higher when the currency rises against the U.S. dollar; this is true for each closing value. One Euro buys $1.39. The number is higher when the Euro is stronger. The yen would normally be quoted at 101.6 using the normal currency conventions; it is a measure of 101.6 Yen per $1; the measure in the table $98.40 is the number of dollars 10,000 Yen would buy.

Energy and metals commodity prices rose on the week.