U.S. Equity Market Radar (January 27, 2014)
The S&P 500 Index ended the week sharply lower falling 2.63 percent. This is the worst weekly decline since June 2012. Earnings season has gotten off to a mixed start, but the real culprit this week was Markit’s Flash Purchasing Managers’ Index (PMI) data for China, which unexpectedly fell into contraction territory. This was quite a surprise and has negative implications for global growth, emerging markets and possibly even tapering.
Strengths
- Traditionally defensive sectors of the market were the best relative performers this week, with utilities and telecommunication services leading the way. It was a “risk off” week; bond yields fell sharply, and telecommunication and utilities were the relative beneficiaries.
- Natural gas prices rose above $5 this week and several natural gas related energy companies rose by more than 5 percent, including Southwestern Energy, Chesapeake Energy, and Cabot Oil & Gas.
- Netflix was the best performer in the S&P 500 this week, rising 16.98 percent. The company released quarterly earnings results which were well ahead of expectations. Both domestic and international subscriber growth was very strong in the fourth quarter, and expectations are for similar results in the first quarter.
Weaknesses
- The materials sector was the worst performer this week as many companies within the sector could be affected by a slowdown in China. Iron and steel companies were particularly hard hit with both Cliffs Natural Resources (iron) and Allegheny Technologies (steel) experiencing double-digit losses.
- The industrials sector was also weak, as cyclical areas generally underperformed. Kansas City Southern was the worst performer falling by more than 14 percent. The company missed earnings estimates and operating rates came in below expectations.
- International Game Technologies was the worst performer in the S&P 500 this week, falling 15.36 percent. The company announced quarterly results with both earnings and revenue falling short of expectations due to declining revenue trends across the gaming industry.
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
- This week could mark the beginning of a short-term market consolidation period after such strong performance over the past six months.
- 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 in the market.
