U.S. Equity Market Radar (March 10, 2014)
The S&P 500 Index rose to new highs again this week. The market was led by both financials and traditional cyclical areas as confidence in an economic recovery continues to build. Economic data was generally good and anything that even hinted of a weather impact was given a pass.
Strengths
- The financials sector was the leader this week as banks and insurance names were strong. Bank of America and MetLife were among the best performers this week. It was a broad-based rally in financials with many stocks appearing to “catch up” with the market after lagging through February.
- The industrials sector was also strong this week, with transportation companies particularly robust. Delta Air Lines, Kansas City Southern, CSX Corp. and Union Pacific were all among the best performers. Delta and airline names were strong after a positive February update from Delta. Railroad companies were buoyed by rising coal demand after such a cold winter in much of the country.
- Valero Energy was the best performer in the S&P 500 rising 10.44 percent this week. Enthusiasm among investors is building for profitability to improve in coming months.
Weaknesses
- The utilities sector underperformed. It was another “risk on” week and bond yields moved sharply higher, hurting the attractiveness of traditional utilities.
- The health care sector took a breather this week as it has been a very strong area over the past year. Biotechnology names came under pressure after New York Federal Reserve Bank President Bill Dudley commented that biotech stocks could have gotten ahead of themselves from a valuation perspective, along with farmland and leveraged loans.
- Staples Inc. was the worst performer in the S&P 500 this week, falling 15.53 percent. The company reported disappointing earnings and revenue along with a weaker forecast, announcing the closure of 225 stores to cut costs.
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 there is potential for policy error.
- A lot of good news is potentially priced into the market and the economy will need to deliver to maintain the positive momentum.
