U.S. Equity Market Radar (September 23, 2013)

U.S. Equity Market Radar (September 23, 2013)

The S&P 500 posted another solid performance this week, rising by 1.30 percent. The market was braced for a reduction in the Federal Reserve’s quantitative easing (QE) program, which it had been communicating to the market since May, but the Fed surprised virtually everyone by not changing its QE program. With the Fed still on the monetary accelerator, the markets surged higher with many interest rate-sensitive groups leading the way as bond yields dropped sharply.

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Strengths

• The industrials sector was the best performer for the second week in a row as the sector experienced broad-based gains. FedEx led the way, rising 8.94 percent as quarterly earnings were well received.
• The utilities sector was not far behind industrials as interest rate-sensitive stocks rallied significantly on the Fed decision.
• Safeway was the best performer in the S&P 500 this week, rising 11.35 percent. The company announced that it had adopted a one-year “poison pill” plan to discourage a hostile takeover.

Weaknesses

• Every sector was positive for the week, but the telecommunication sector just barely eked out positive results. Frontier Communications was the worst performer, falling by more than 3 percent on concerns of dividend sustainability.
• Energy was among the laggards again this week as the refiners were down again.
• WellPoint was the worst performer in the S&P 500 for the week, falling 7.59 percent. The company would be negatively affected if CMS delays the October 1 start of open enrollment in the new healthcare exchanges.

Opportunity

• 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 Fed to 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.
• An improving macro backdrop out of Europe and China could be the next catalyst for the market to move higher.

Threat

• A market consolidation could occur in the near term after such a strong year.
• Higher interest rates are a threat for the whole economy. The Fed must walk a fine line and the potential for policy error is potentially large.