Index Summary and U.S. Equity Market Notebook (2010-05-10)

Index Summary Notebook (2010-05-10)

• The major market indices were down this week. The Dow Jones Industrial Index fell 5.71 percent. The S&P 500 Stock Index lost 6.39 percent, while the Nasdaq Composite finished 7.95 percent lower.
• Barra Growth underperformed Barra Value as Barra Value finished 6.14 percent lower while Barra Growth lost 6.65 percent. The Russell 2000 closed the week with a loss of 8.88 percent.
• The Hang Seng Composite finished lower by 6.61 percent; Taiwan was down 5.46 percent and the Kospi declined 5.40 percent.
• The 10-year Treasury bond yield closed at 3.42 percent, down 24 basis points for the week.

U.S. Equity Market Notebook (2010-05-10)

The figure below shows the performance of each sector in the S&P 500 index for the week. All ten sectors were down. The best-performing sector was consumer staples, down 2.96 percent. Other better-performing sectors included telecom services and healthcare. The three worst-performing sectors were materials, industrials, and energy.

Within the consumer staples sector the best-performing stock was Dr Pepper Snapple Group Inc., up 9.1 percent. The only other rising stock in the sector was Kraft Foods Inc., up 1.6 percent. The other three top-five performing stocks were Kimberly-Clark Corp., Walgreen Co., and Pepsico Inc.

Strengths

• There were no groups rising in price this week. The best performing group was soft drinks, down 1 percent. Dr. Pepper Snapple Group Inc. aided the group’s performance by reporting quarterly earnings above the consensus estimate. It also raised its earnings forecast for the year, saying that it expects results in the second half of the year to be much stronger than in the first half. The stock was up 9 percent for the week.
• Four of the top-ten best-performing groups were in the consumer staples sector, a sector considered to be defensive in a declining market. In addition to the soft drinks group discussed above, other outperforming groups in the consumer staples sector were packaged foods & meats, hypermarkets & supercenters, and household products. These latter three groups were down in a range of 2 to 3 percent.
• Three of the top-ten groups were in the healthcare sector, also considered to be a defensive sector in a declining market. These were the healthcare distributors group, the pharmaceutical group, and the healthcare technology group, all down about 3 percent.

Weaknesses

• The building products group was the worst-performing group, falling 16 percent. The group’s single member, Masco Corp, reported earnings the prior week, ahead of the consensus estimate, but it forecast restructuring charges of about $140 million for 2010, up from the prior estimate of $70 million.
• The industrial REITS (real estate investment trust) group underperformed, losing 16 percent. Its single member, ProLogis, reported earnings below the consensus and lowered its forecast on April 22.
• The health care facilities group underperformed, down 15 percent, led by its single member, Tenet Healthcare Corp. The hospital operator reported first quarter earnings above the consensus estimate, but it reported weak patient volumes amid a mild flu season and fewer elective surgeries.

Opportunities

• There may be an opportunity for gain in M&A (merger & acquisition) transactions in 2010. Corporate liquidity is high, thereby providing the means to pursue acquisitions.

Threats

• Should investors’ expectations for an improving economy not come to fruition in a reasonable time frame, it could be a threat to stock prices.
• As governments around the world begin to wind down the monetary and fiscal stimulus programs put in place during the economic crisis, it will likely present a headwind for stocks.