U.S. Equity Market Radar (January 23, 2012)
The domestic stock market as measured by the S&P 500 Index was higher this week by 2.04 percent. We have seen a global rally in January with much of this performance coming this week. When trying to decipher the underlying cause it is often helpful to look at significant government policy actions.
On December 21, 2011 the European Central Bank (ECB) implemented the first tranche of the three-year long-term refinancing operation (LTRO) of approximately $635 billion, as the ECB attempted to secure long-term funding for banks that would allow them time to work through their current difficulties without the fear of a run on the bank. Another round of funding is scheduled for February. The chart below compares the timing of the current LTRO to the Federal Reserve’s quantitative easing and TARP program in 2008. The LTRO program is a form of quantitative easing and judging by the effect on the global equity markets, it appears to be working. The chart below looks at the global equity risk premium as a proxy for equity risk aversion and as can be easily seen in the chart , the end of 2011 was a very fearful time for equity investors. If 2008 and 2009 set precedent, then 2012 is shaping up to be a good year.
Strengths
- The information technology sector was the best-performing sector this week as several bellwether technology companies reported earnings that were well received by the market.
- The semiconductor equipment group was particularly strong, increasing by more than 8 percent as strong earning results combined with increased orders or capital expenditure announcements from Intel and Taiwan Semiconductor.
- The investment bank and brokerage industry group was also strong with Goldman Sachs and Morgan Stanley both up around 10 percent for the week on the back of well received earnings reports.
Weaknesses
- The utilities sector underperformed and was the only sector to post negative performance for the week, as the market rotates away from defensive areas.
- The auto parts and equipment industry group underperformed as Johnson Controls lowered guidance on weak European production and currency effects.
- The educational services group also underperformed as talk surfaced on possible legislation that would reduce incentives for for-profit colleges to target and aggressively recruit veterans and service members.
Opportunities
- Early earning results have been encouraging so far and the market has responded, and we move into the heart of earnings season next week.
Threats
- An escalation in concerns over sovereign debt obligations in Europe would be negative for stocks.
