U.S. Equity Market Radar (February 10, 2014)
The S&P 500 Index bounced back this week, gaining 0.81 percent, and finishing strong with back-to-back gains of more than 1 percent. Cyclical areas of the market experienced the biggest lift this week with consumer discretion and materials leading the way.
Strengths
- The consumer discretion sector experienced broad-based strength this week. The auto-related retailers were strong, with Autozone and O’Reilly Automotive among the leaders, on the back of strong quarterly results. Michael Kors Holdings led the way this week, rising 17.88 percent on very strong quarterly results.
- The materials sector also outperformed this week. Construction materials were strong as Vulcan Materials reported better-than-expected results, coming on the back of merger activity in the industry last week. The fertilizer-chemical space also was strong with solid performance by Mosaic, Monsanto and CF Industries.
- Akamai Technologies was the best performer in the S&P 500 this week, rising 18.79 percent. The company released quarterly earnings results, which were ahead of expectations, and forecasted first-quarter earnings and revenues ahead of analysts’ estimates.
Weaknesses
- The telecommunication services sector was the worst performer this week with Verizon Communications and AT&T each falling 2.5 to 3 percent. AT&T announced a new family pricing plan as the pricing wars escalate within the industry.
- The utilities sector was also weak, in what appears to be some sector rotation as the utilities sector remains the best year-to-date performer.
- Dun & Bradstreet was the worst performer in the S&P 500 this week, falling 11.13 percent. The company announced quarterly results that slightly disappointed, but the new CEO laid out his strategic vision for the company which will require additional investments and execution risks.
Opportunities
- The current macro environment remains positive as economic data is 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 short-term market consolidation period after such strong performance over the past six months cannot be ruled out.
- 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 good news may be priced into the market and the economy will need to deliver to maintain the positive momentum in the market.
