U.S. Equity Market Radar (April 7, 2014)
The S&P 500 Index remained resilient for the week with a gain of 0.40 percent after making another record high on Wednesday. Sector rotation continued from growth to value in the wake of earnings season and was reinforced by renewed investor interest in emerging markets and commodities. This came amid Chinese fiscal stimulus measures and the European Central Bank’s apparent readiness for action if inflation continues to slide.
Strengths
- The industrials sector rose 1.43 percent this week as the U.S. ISM Manufacturing Purchasing Managers’ Index accelerated to 53.7 in March from 53.2 in February, breaking above its three-month moving average. Machinery stocks exhibited strength with domestic coal shipments via rail, signaling improving demand for heavy equipment.
- Retail consumer electronics was the best performing industry group, as Best Buy staged a 6.25 percent recovery on expectations of a sales comeback led by mobile devices, home appliances, and gaming consoles in the second quarter.
- Anadarko Petroleum was the best performer in the S&P 500, rising 18.97 percent this week. The company agreed to pay a $5.15 billion settlement for the cleanup of 85-years-worth of pollution left behind by its Kerr-McGee unit, a sum less than market expectations.
Weaknesses
- The technology sector finished the week down 0.73 percent amid ongoing rotation out of high quality and growth companies.
- Financials also lagged with exchanges and discount brokers hurt the most, as sentiment soured in fear of a regulatory crackdown on high-frequency trading, which may affect order flows.
- E*Trade was the worst performer in the S&P 500 this week, falling 9.56 percent in the midst of a selloff in discount brokers due to heightened regulatory risk related to high-frequency trading.
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.
- 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 is potentially priced into the market and the economy will need to deliver to maintain this positive momentum.
