U.S. Equity Market Radar (January 20, 2014)

U.S. Equity Market Radar (January 20, 2014)

The S&P 500 Index ended the week modestly lower. This week kicked off earnings season with several high profile reports, including JP Morgan, Bank of America and General Electric just to name a few. Overall the results so far have underwhelmed and the market reacted accordingly.

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Strengths

• The technology sector was the best performer this week, led by Juniper Networks which rose by more than 10 percent. Activist hedge fund Elliot Management Corp. disclosed a 6.2 percent stake in Juniper Networks and is seeking cost cuts, stock buybacks and a potential dividend payment.
• The telecom services sector was also among the best performers this week. Verizon was among the best performers as the company won at least a partial victory in its appeal of “net neutrality” lawsuit against the Federal Communications Commission.
• Beam was the best performer in the S&P 500 this week, rising 24.44 percent. The alcoholic beverage maker received a buyout offer from Japanese firm Suntory.

Weaknesses

• The consumer discretion sector was the worst performer this week as numerous retailers’ disappointed street expectations including Best Buy, GameStop and Staples.
• The energy sector was also weak as the refiners and offshore drillers lead the group lower. U.S. gasoline inventories rose to the highest levels since February 2013, pressuring the refining group, while negative fleet updates by Noble Corp, Transocean and Ensco dragged down the offshore drilling group.
• Best Buy was the worst performer in the S&P 500 this week, falling 35.39 percent. The company announced same store sales for the fourth quarter declined 0.8 percent vs. expectations of a small gain. The company also aggressively cut prices to compete with Amazon and Wal-Mart which will hurt margins. The company has been in turnaround mode and this was viewed as a serious and unexpected setback. Fortunately, our funds didn’t own Best Buy. Though we are leaning into the strength of the consumer discretion sector, our stock selection models indicated that Best Buy was not a best buy based on company fundamentals.

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Opportunities

• 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 aggressively 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 economic situation could possibly drive equity prices well into 2014.

Threats

• A market consolidation could occur in the near term after such strong performance.
• 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.
• Potentially a lot of good news is priced into the market and the economy will need to deliver to maintain the positive momentum in the market.