Dresses, Llamas and about 1,000 points on the Dow.

Quietly, February was a month in which the Dow went from an opening index level of 17,170 to close at 18,132…making it a great month for stocks. It’s as if a Stealth Bomber flew over and dropped 963 points on the Dow and no one saw it come or go.

The Dow ended up 37 points shy of being a 1,000 point month. If Friday had eked out 38 points, it would have only been the third month in history to gain 1,000 points.

The last time the Dow gained 1000 points in a month?  October of 2011.

It was good to see that through all kinds of distractions, like oil, Greece, the Fed, important debates about the color of a dress and an OJ Simpson-like coverage of two llamas on the loose, U.S. stocks indices were able to power higher across the board.

Inflation and Disinflation

The Consumer Price Index (CPI) fell 0.7% in January. This equates to an annual decline of 0.1%, meaning that technically, the U.S. has slipped into a period of deflation.

But let’s not get all worked up into a lather over this issue since the steep decline in oil and gasoline prices we have seen since last summer is pretty much responsible for the drop in the CPI… the energy portion of the index fell 9.7% and the gasoline portion of the index fell 18.7% in January.  January was the sharpest in a series of seven consecutive monthly declines.  I wrote about disinflation in the face of declining oil and gas prices in the very first paragraph of this blog from early February, 2015.

So let’s look at what is referred by economists and smarty pants people at cocktail parties as the Core CPI. (The regular CPI is sometimes referred to as “Headline CPI” since it, well, it grabs the headline.) The Core CPI excludes the volatile energy and food components of the Headline CPI. In January, Core CPI rose 0.2% versus December, and is up 1.6% versus one year ago.

That Core CPI reading is also unchanged from December’s reading of 1.6%. In fact, it’s been fairly steady over the last couple of years. See the chart below and take note of the red line.

Here’s my thinking: oil prices can’t fall forever.  So because of that, we’re likely to see the headline CPI eventually back turn positive (and it’s BARELY negative).  Along with what we are seeing is what we are not seeing, and that is falling gasoline prices have failed to flow through to the Core CPI because an expanding economy translates into stronger sales at many firms.

Who cuts prices when business is growing?

Also, this ties into the Fed and when they are going to raise interest rates.  Core inflation is at 1.6%, which is historically pretty low… and that is something the Fed pays attention to.

CLOSE ATTENTION.

Why? Because price stability is a critical element of monetary policy. It not only permits companies to better plan for the long run, but it helps people living on fixed incomes to plan better, as well.

Last week, Fed Chief Janet Yellen testified before two Congressional committees on the economic outlook and monetary policy. Without boring you with the details of her speech, she basically said that central bankers want to see inflation moving towards its 2% target before it hikes rates.

Now for those of you who are inclined to try to time the Fed and their first raise, I offer you this handy cheat sheet from Bespoke.

You see, figuring out the path to a rate hike should be no problem… (insert sarcasm).

Warning to investors (i.e. the opposite of traders… and if you are reading this, you are not a trader and if you are a trader you probably suck at it anyway)… DON’T TRY TO TIME ANY OF THIS.

Earnings Season

Earnings season has (unofficially) come to an end and over 1,500 companies have reported their earnings and revenue for the fourth quarter (4Q) of 2014.  According to Bespoke, here’s how we ended up:

• The percentage of companies beating their revenue estimates for the 4Q finished at 58.1%, which is slightly below the average of 60% that we’ve seen since 2001, but above the 57.2% that finished up the 3Q of 2014. Since the revenue readings bottomed out in the 4Q of 2011, quarter-over-quarter readings ping pong but the trend has been positive for revenues.

• The percentage of companies beating their earnings estimates finished at 61.1%, which is slightly below the average of 62% dating back to 1998, and the 62.1% final reading from the 3Q of 2014.

Bespoke also publishes a chart that shows the spread between companies guiding future earnings higher or lower on a percentage basis.  Up until the 1Q of 2014, the spread had been negative for the TEN previous quarters, meaning there are more companies stating they will earn less in the upcoming quarter than the same quarter a year prior. That’s 2.5 years of pessimism coming out of corporate America.

After two flat quarters in the 1Q and 2Q of 2014, we saw the 3Q revert back to a negative reading. The final reading for the 4Q of 2014 shows the spread between companies posting negative guidance versus companies posting positive guidance in the 4Q was a whopping -9.4%! This was the worst spread reading since the last two quarters of the 2008.

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