U.S. Equity Market Radar (June 23, 2014)
The S&P 500 Index bounced back sharply this week after last week’s pause. Interest rate sensitive areas tended to outperform with utilities, health care and consumer staples among the leading groups. Energy also performed well on the back of continued geopolitical uncertainties, even though oil rose only modestly.
Strengths
- The utility sector experienced a broad-based, macro-driven rally, with every constituent of the S&P 500 Utility Index advancing for the week. The results of this week’s Federal Open Market Committee (FOMC) meeting went more or less as expected, but with a slightly more dovish tone, pushing prospects of interest rate hikes further into the future.
- The energy sector was also a strong performer this week with refiners and oil service names particularly strong. Energy has been the best performing sector over the past one-month and three-month periods on rising oil prices and geopolitical risk ranging from Ukraine to Iraq.
- Covidien was the best performer in the S&P 500 Index, rising 25.1 percent this week. Medtronic bid $42.9 billion for Covidien to gain scale and position the company as the largest provider of numerous medical devices.
Weaknesses
- The S&P 500 Health Care Index was among the worst performers this week, driven lower by Express Scripts. It was disclosed that its CEO sold 26 percent of his stock position, which spooked some investors.
- The S&P 500 Apparel Accessories Luxury Goods Index was also hit hard as Coach was the worst performer, falling 11.8 percent after slashing its forecast at the company’s analyst day.
- Other poor performers in the S&P 500 this week included Conagra Foods, Yahoo! and Whole Foods.
Opportunities
- Earnings reports for companies in the S&P 500 pick up some next week with key consumer names reporting such as Nike, Walgreens and CarMax. The reports, combined with next week’s consumer confidence data, should provide good reading on the near-term direction of the economy.
- Quite a bit of housing data will be released next week, such as new home sales, existing home sales and S&P/Case-Shiller Home Price Index data. This data is an important read on the economy. To round out the color on the sector, homebuilder Lennar reports next week along with Bed Bath & Beyond.
- The market seemed to really respond to the dovish Fed positioning and it appears the path of least resistance is higher.
Threats
- The second quarter is closing fast and we haven’t had the seasonal correction that we experienced the past few years.
- At almost 18 times trailing earnings, the S&P 500 is not cheap. Valuation may be a headwind for future market gains.
- Focus will shift to upcoming earnings, and we are in the pre-announcement season when negative news will likely be divulged.
