U.S. Equity Market Diary (October 18, 2010)

U.S. Equity Market Diary (October 18, 2010)

The figure shows the performance of each sector in the S&P 500 Index for the week. Eight sectors gained and two declined. The best-performing sector was technology, up 3.9 percent. Other better-performing sectors included consumer staples and energy. The three worst-performing sectors were financials, industrials and telecom services.

Within the technology sector the best-performing stock was Western Digital Corp., up 10 percent. Other top-performers were Apple, EMC, Dell and Lexmark International.

Strengths

• The fertilizer & agricultural chemicals group was the best-performing group for the week, gaining 11 percent. Both stocks in the group—CF Industries Holdings and Monsanto—have appreciated following the U.S. Department of Agriculture’s cut in the corn yield forecast last Friday.
• The internet software & services group outperformed, up 10 percent. Google led the group after reporting third quarter earnings substantially above the analyst consensus estimate. Following the earnings report several analysts raised their price targets for the stock.
• The distributors group outperformed, rising 6 percent, led by its single member, Genuine Parts Co. The distributor of automotive and industrial replacement parts reported third quarter earnings and revenue above the consensus estimate.

Weaknesses

• The education services group was the worst-performing group, down 24 percent. The for-profit education company Apollo Group withdrew its prior preliminary business outlook for fiscal 2011 due to continued low enrollment figures for the University of Phoenix. These comments led to wide-spread declines in the stocks of other for-profit education companies.
• The home entertainment software group (Electronic Arts) underperformed, losing 10 percent. The U.S. sales of video-game hardware, software and accessories fell 8 percent in September from the same time period a year earlier.
• Three bank-related groups (other diversified financial services, diversified banks and regional banks) were among the 10 groups with the largest declines. This weakness among banks appeared to be related to concern over mortgage buybacks. Additionally, there has been concern over the slowdown/halt of mortgage foreclosures by banks.

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 on 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.