U.S. Equity Market Radar (September 30, 2013)
After rallying for three weeks in a row, the market took a breather this week as the S&P 500 fell by more than 1 percent. Weakness was across the board with all sectors posting losses for the week. After hitting new highs mid-week last week, it felt like a normal pullback to consolidate recent gains.
Strengths
- The consumer discretionary sector was the best performer in a down week. Nike led the way, gaining 6.16 percent on better-than-expected quarterly earnings results. Newspaper-related companies were also strong. Gannett rose 4.5 percent as its merger with Belo Corp. was approved by shareholders. The Washington Post also had a good week, rising 5.3 percent.
- The utilities sector was not far behind industrials, with interest-rate-sensitive stocks rallying as bond yields continued to move lower this week.
- Applied Materials was the best performer in the S&P 500 this week, rising 10.62 percent. The company announced a merger with Tokyo Electron, making the combined company by far the largest company in the semiconductor equipment industry.
Weaknesses
- The consumer staples sector was the worst performing group, falling by more than 2 percent. Weakness in the sector was broad-based, with food companies and tobacco stocks among the worst performers.
- Financials also lagged for the week with the large banks and brokers among the worst performers. Goldman Sachs, Citigroup, Morgan Stanley and Bank of America were the worst performers. Earnings estimates have been coming down for the large brokers as the third quarter was a particularly tough quarter for fixed income trading revenue.
- J.C. Penney was the worst performer in the S&P 500 for the week, falling 30.17 percent. The company announced it was raising equity which dilutes existing shareholders by about 30 percent. The company is attempting to execute a turnaround and required additional liquidity to ensure cash through the critical holiday selling season.
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 Federal Reserve 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.
- The 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.
- The debt-ceiling debate has captured investors’ attention this week and potential missteps in Congress could create uncertainty and offer short-term oriented investors a reason to sell.
