A perfect example of how market sentiment can be largely unphased in the face of negative news is the minor adjustments that U.S. stocks made on January 11, as investors worldwide found out about Chinese inflation threats and declining bank shares.
Tepid stock changes
The benchmark S&P 500 barely changed, finishing the day less than 0.1 percent lower at 1,472.07 at 4 p.m. New York time, Bloomberg reports. On January 10, this group of blue-chip stocks surged to a new five-year high. The Dow Jones Industrial Average also experienced very minor changes, closing up 0.1 percent at 13,488.58.
Reuters reports that the tech-heavy Nasdaq Composite Index registered similar changes, increasing 0.1 percent. In addition, European equities only gained slightly.
One piece of news that drew substantial visibility was Chinese inflation, which surged to its highest rate in seven months and surpassed forecasts, according to Bloomberg. This sharp rally in the price level was largely attributed to the Asian nation encountering its most harsh winter in 28 years, which caused the price of vegetables to skyrocket.
The ability of China's government to stimulate the economy through monetary easing could potentially be limited by the robust increases in prices experienced recently, the media outlet reports.
"The good news about China is that it is in a trajectory of improvement," Bruce McCain, chief investment strategist at the private-banking unit of KeyCorp in Cleveland, told the news source during a phone interview. His company has $20 billion under management. "The bad news is that it may also boost inflation. In the U.S., people will be focused on earnings. It's not great yet, but it certainly has the potential for improvement as we get further into the year."
Financial stocks had a rough day, with the S&P 500 financial sector index dropping 0.7 percent. The KBW Banks index had an even worse day, plunging 1.3 percent. Reuters reports that these sharp declines were largely attributed to earnings announcements of major bank Wells Fargo. The shares of this bank plunged more than 1 percent.
The first major bank to report its earnings results for the fourth quarter, Wells Fargo specified that even though its profits surged 24 percent, its net interest margin dropped, according to the news source.
This figure is a key metric that indicates how much money banks are making from loans. In addition, businesses and individuals took out fewer loans from the major bank than they did in the prior quarter.
Larry Peruzzi, senior equity trader at Boston-based Cabrera Capital Markets LLC, said that the earnings data released by Wells Fargo "is weighing on the sector. We are keeping our fingers crossed that this won’t be a sector thing and more confined to Wells Fargo, but it's definitely playing a factor today."
Of the blue-chip stocks contained in the S&P 500, 27 companies have reported their financial results for the fourth quarter. These figures have generally been higher-than-expected, with Bloomberg data indicating 80 percent of these firms provided numbers above the predictions of analysts.
These market experts have predicted that the fourth-quarter earnings of these S&P 500 firms have risen 2.5 percent. If this number is accurate, it will be the second-weakest performance of any quarter since 2009.
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