U.S. Equity Market Radar (December 30, 2013)
The S&P 500 Index experienced a broad based rally during this holiday shortened week. Cyclicals tended to outperform as investors confidence continues to build for continued economic improvement in 2014.
Strengths
- The materials sector was the best performer this week, led by Alcoa, Cliffs Natural Resources and U.S. Steel, which all rose by more than 7 percent. News flow was generally quiet; this appeared to be more of a sector rotation story into cyclical areas of the economy.
- The telecom services sector was also strong this week as both AT&T and Verizon rose by more than 2 percent. There was continued speculation that Sprint would merge with T-Mobile, which also attracted investors to this sector.
- Cliffs Natural Resources was the best performer in the S&P 500 this week, rising 9.58 percent. While there was little company specific news, the stock had been heavily shorted and with expectations of better growth ahead it may have been short covering that led to this week’s move.
Weaknesses
- The utilities sector was the worst performer this week as Treasury yields continued to climb. The 10-year Treasury breached the psychologically important 3 percent level on Friday.
- Airlines and internet retailers underperformed this week. Delta was down 3 percent on Friday after a computer glitch allowed customers to purchase cross country tickets at a fraction of their value. Internet retailers and internet companies generally came under pressure Friday as shipping delays that prevented packages from arriving in time for Christmas left many companies in a public relations bind.
- Whole Foods Market was the worst performer in the S&P 500 this week, falling 4.37 percent. Food retailers underperformed this week without much news flow. The consumer staples sector lagged this week as a rotation into cyclicals continues.
Opportunities
- 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 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 potentially large.
- A lot of potentially good news is priced into the market and the economy will need to deliver to maintain the positive momentum in the market.
