U.S. Equity Market Radar (May 27, 2013)
The S&P 500 finished the week down 1.07 percent, the first weekly retreat in five weeks, as skeptical investors grappling with the market’s unseasonal strength seized upon any sign of negativity to take profits. Among the most cited excuse was Federal Reserve Chairman Ben Bernanke indicating in the Q&A session of his congressional testimony the possibility to taper quantitative easing “in the next few meetings” if the economy continued to improve in a sustainable manner. The index managed to stand above its twenty-day moving average in spite of the correction.
Strengths
- The healthcare sector was the leader this week in relative performance, as investors continued to prefer strong free cash flows, above average dividends and stable businesses uncorrelated with economic booms and busts.
- The energy sector was the second-best performer, led by natural gas exploration and production companies as natural gas rebounded 4.4 percent this week following the Department of Energy’s conditional approval of exporting liquefied natural gas to countries without a free-trade pact with the U.S.
- Hewlett-Packard was the best performer in the S&P 500 this week, gaining 13.8 percent. Cost-cutting measures have been successful in lifting quarterly earnings, and CEO Meg Whitman’s remarks raised investor expectations for a return to growth in 2014.
Weaknesses
- The utilities sector was the worst performer this week, as the macro rotation continued from defensive to cyclical areas of the market.
- The telecom sector also underperformed largely attributable to a recovery in investor risk appetite.
- GameStop was the worst performer in the S&P 500 this week, declining 19.2 percent because of its downbeat, second-quarter guidance as well as uncertainty that new Microsoft Xbox consoles may include technology restricting use of pre-owned games.
Opportunity
- There are signs in the U.S. and Europe that fiscal austerity may lessen in the second half of the year, a positive for growth recovery.
- Lower food and energy prices globally are helping to keep a lid on inflation, a blessing for global central bankers pondering further accommodation of monetary policy.
Threat
- A market consolidation could continue in the near term, as the S&P 500 kept trending higher beyond its all-time record for a month, defying the proverbial “Sell in May” seasonal pattern.
- The U.S. dollar is lingering around its three-year high, which may translate into lower earnings for S&P 500 companies going forward, since around 50 percent of S&P 500 earnings are made from overseas.
- Global central banks are literally pulling out all the stops in an attempt to ignite economic growth. The European Central Bank (ECB) cut interest rates last week, which is a move in the right direction as far as the market is concerned.
