Equity Market
The S&P 500 powered ahead by more than 2 percent this week as the government shutdown and the debt ceiling impasse reached a temporary solution, and earnings were generally well received. Earnings season kicked off in full force this week, and judging by initial results, the market liked what it saw. One interesting angle to the rally this week was that non-cyclicals tended to outperform, with telecom and healthcare among the leaders.
Strengths
- The telecom sector was the best performer this week as Verizon Communications rose by more than 6 percent with third-quarter earnings better-than-expected, driven by wireless revenues.
- The financials sector also rallied this week as earnings reports were well received. Standout performers included Charles Schwab, Blackrock, American Express and Morgan Stanley. All four companies reported earnings and all rose by at least 6 percent.
- Google was the best performer in the S&P 500 this week rising 16 percent. The company beat earnings estimates on better mobile-ad revenue and optimism is high regarding future monetization of this trend.
Weaknesses
- The utilities sector was the worst performing group this week but rose nearly 1 percent for the week. This is a defensive sector that simply lagged in a strong market.
- It was a tough week for managed care companies, with UnitedHealth Group disappointing just as the market was growing accustomed to an earnings beat and raise. It did not continue in this quarter, taking the entire industry down with it.
- Teradata Corp. was the worst performer in the S&P 500 this week, falling 19.47 percent. The company preannounced disappointing quarterly results and cut their full year outlook. The company did not provide many details, leaving unanswered questions leading into the scheduled October 31 earnings report.
Opportunity
- The current macro environment remains positive as economic data remains robust enough to give investors confidence in an economic recovery but not too strong as to force the Federal Reserve to change course in the near term.
- Money flows are likely to find their way into domestic U.S. equities and out of bonds and emerging markets.
- The improving macro backdrop out of Europe and China could be the catalyst for a rally into year end.
Threat
- A market consolidation could occur in the near term after such a strong year.
- Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the likelihood for policy error is potentially large.
- The debt ceiling and government shutdown has passed, but the economic fallout will likely be felt throughout the next weeks and even months as it negatively affects upcoming economic data releases.
