U.S. Equity Market Diary (December 6, 2010)
The figure below shows the performance of each sector in the S&P 500 Index for the week. All ten sectors increased. The best-performing sector for the week was materials, which rose 5.7 percent. Other outperforming sectors included energy and financials. Consumer staples was the worst performer, followed by utilities and healthcare.
Within the materials sector, the best-performing stock was Freeport McMoRan Copper & Gold, Inc., up 11.1 percent. Other top-five performers were Vulcan Materials Co., AK Steel Holding Corp., U.S. Steel Corp., and Alcoa, Inc.
Strengths
- Building-related groups were among the top performers for the week with the building products group and the homebuilding group up 12 percent and 11 percent, respectively. The October pending home sales index rose 10.4 percent month-over-month, exceeding economists' expectations for a 1 percent decline.
- The diversified metals & mining group rose 11 percent, led by its single member, Freeport McMoRan Copper & Gold, Inc. The prices of copper and gold rose for the week.
- The home improvement retail group gained 9 percent, led by Lowe's Companies Inc. The firm held its annual analyst day in which it outlined a path to grow earnings by a 20 percent compound annual growth rate from fiscal year 2011 through fiscal year 2015. In this same timeframe, it expects to repurchase $18 billion of its common stock.
Weaknesses
- The food retail group was the worst performer, down 4 percent, led by The Kroger Co. The supermarket firm met the consensus earnings estimate, and it narrowed the range of its earnings estimate for the fiscal year. A major brokerage firm downgraded the stock, saying that competition is not allowing the higher food costs to be passed through fully, thus pressuring profitability.
- The department store group declined 2 percent, led by Kohl's Corp. The retailer reported November same-store-sales increased 6.1 percent, but the stock sold off on the announcement of a $0.10 decrease in third quarter earnings due to an accounting adjustment related to leased properties.
- The retail computer & electronics group lost 2 percent, led by Best Buy Co., Inc. A major brokerage firm lowered its sales comparison estimate and earnings estimate for the retailer's third quarter, citing a higher incidence of lower ticket sales during "Black Friday" and increased competition from office products retailers in the consumer electronics space.
Opportunities
- There may be an opportunity for gain in merger & acquisition (M&A) 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 timeframe, 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.
