U.S. Equity Market Radar (December 23, 2013)
The S&P 500 Index rose this week in a broad-based rally. The Federal Reserve somewhat surprised the market by reducing its monthly quantitative easing program by $10 billion to $75 billion. The market has had plenty of time to digest the potential ramifications and responded with a resounding show of support. The taper in combination with a budget deal in Washington eliminated some uncertainty and cleared the way for a rally. Cyclical areas of the market led the way as expectations are for global economic acceleration.
Strengths
- The industrials sector was the best performer this week, led by Textron which rose by more than 18 percent. On Friday, the stock rose by more than 14 percent as it was reported that the company was close to purchasing plane maker Beechcraft for $1.4 billion.
- The materials sector experienced broad-based strength with nearly every stock in the index higher for the week. Dow Chemical, Alcoa and Eastman Chemical were among the leaders, all rising by more than four percent.
- LSI was the best performer in the S&P 500 this week, rising 38.18 percent. The company agreed to be bought by Avago for $6.6 billion, which was a 41 percent premium to the company’s closing price last Friday.
Weaknesses
- All market sectors were higher this week, but traditionally defensive areas such as utilities, consumer staples and telecom services lagged.
- Ford was down 7 percent this week as the company expects 2014 profits to be roughly $1 billion below 2013 levels. Drivers of the lower profit forecast include increased product launches, weakness in Europe and South America along with capital investments in plant construction.
- Jabil Circuit was the worst performer in the S&P 500 this week, falling 15.47 percent. The company announced earnings that missed Wall Street estimates and predicted sales would decline in the current quarter in two of three business units. Speculation was Jabil was suffering from a slowdown in production of Apple iPhones, but that was not explicitly confirmed by the company.
Opportunities
- The current macro environment continues to be positive as economic data remains robust enough to give investors confidence in an economic recovery, but not too strong as to force the Fed to aggressively 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 economic situation could possibly drive equity prices well into 2014.
Threats
- A market consolidation could occur in the near term after such strong performance.
- Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is large.
- A lot of potentially good news is priced into the market and the economy will need to deliver to maintain the positive momentum.
