U.S. Equity Market Radar (February 18, 2014)
The S&P 500 Index roared back this week in a broad-based rally, rising by more than 2 percent and virtually vanquishing the pullback that began in mid-January. Sector performance had a somewhat unusual mix, with both cyclical and defensive areas exhibiting truly mixed relative performance.
Strengths
- The utility sector led the way this week with particular strength coming from gas utilities, as natural gas prices shot back above $5.
- The health care sector was not far behind, with strong performances from biotechnology and medical device makers. Strong performers included Alexion Pharmaceutical, Regeneron Pharmaceutical and St. Jude Medical.
- Goodyear Tire & Rubber was the best performer in the S&P 500 this week, rising 13.73 percent. Goodyear released quarterly earnings results which were ahead of expectations and the company was able to de-lever the balance sheet, which was a positive surprise for the market.
Weaknesses
- We experienced a broad-based rally this week, with only pockets of weakness. Airlines were weak on the back of significant weather disruptions along much of the East Coast.
- The fertilizer group was also weak as Monsanto and CF Industries both experienced modest declines for the week.
- WPX Energy was the worst performer in the S&P 500 this week, falling 9.11 percent. The company announced its capital plan and production guidance for 2014. Production guidance was weaker than expected, while capital expenditure (CAPEX) is expected to rise by 20 to 25 percent.
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 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.
