Weekly Market Notes
January 6, 2014
Dow 16469 – S&P 500 1831
The technical condition of the market is mildly bullish. Seasonal conditions and a bullish Tape favor further rally in early 2014. According to Ned Davis Research, the stock market has risen 65% of the time in January since 1928 with a median return of slightly more than 1.50%. The performance of the broad market was very strong in December, which historically is unusual. Many cross currents often occur in the final month of the year due to tax considerations. As a result the broad market typically underperforms the popular averages in December. Not so in 2014 as the percentage of industry groups in uptrends has remained near the highs for the year and the advance/decline line made a new record high last month. Given the extreme level of confidence seen in the latest investor sentiment data, the performance by the broad market is considered crucial to further upside progress in the stock market. Very near-term, given the seasonal tailwind and strong Tape we anticipate that the path of least resistance will be to the upside early in the first quarter. Investors should focus on the strongest sectors including the industrials, consumer discretionary and the financials.
As the economy improves corporations are expected to invest in new plant and equipment, which will leave less cash available for buying back their own stock. Money market funds, which represented 46% of the capitalization of the stock market at the 2009 bottom, are now less than 16% This argues that from a flow-of- funds perspective the individual investor will become increasingly important as a source of new money (demand) for stocks in 2014. Last year was one of strongest for stocks in recent memory and this is encouraging many that missed the rally to allocate a larger percentage of their portfolios to equities. This is important because in recent years the principal source of demand for stocks has come, in addition to money market funds, from corporate buybacks. The movement out of bonds and into stocks will hinge on the behavior of interest rates. A rise in the yield of the benchmark 10-year Treasury note toward 3.50% would likely cap the upside for stocks by applying pressure on the Fed to withdraw from quantitative easing sooner than expected.
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Data on the U.S. economy turned decidedly positive late in the fourth quarter of 2013. Third quarter GDP was revised sharply higher to a 4.1% annual rate from 3.6%. The increase was the second largest in the current expansion and well above the historical average of 3.3% according to Ned Davis Research. The GDP numbers suggest the business expansion is gaining momentum. The upbeat data was the result of stronger consumer spending and improvement in capital spending by corporations. Personal consumption expenditures (PCE) were revised up to a 2.0% annual rate and contributed 1.36 percentage points to growth. Corporate profits rose 1.9%, which was due primarily from stronger financial profits as non-financials were revised slightly down to 1.0% from 1.1%. On a year-over-year basis, corporate profits are up 5.7%. The ISM Manufacturing Index slipped 0.3 points to 57 in December but it was still the second highest reading since the second quarter of 2011. The latest ISM number is consistent with strong growth historically.
Labor market conditions are improving. Initial claims for unemployment insurance plunged 42,000 in late December, the most since November 2012. Bloomberg’s Consumer Comfort Index rose for the fifth straight time last week to the best level since August. The Conference Board’s Consumer Confidence Index jumped more than six points in December to 78.1, the highest level in three months. The improvement in consumer confidence is directly related to the improvement in the jobs market and the above average gains in the stock market in 2013. This week’s business data includes the ISM Non-Manufacturing Index, the Redbook, a weekly measure of comparable store sales at chain stores, discounters and department stores and the December Employment Report, which is due Friday. The focus of attention will be on Friday’s Employment Report. Consensus estimates are that the economy generated 200,000 new jobs in December with the level of unemployment steady at 7.0%. The threat to the markets is that the jobs data is reported much stronger than expected, which could cause the Fed to shift from offense to defense.
Sector Rankings and Recommendations
No. 1 Industrials = Strong RS – Buy. Groups expected to outperform: Office Services & Supplies, Air Freight & Logistics, Industrial Conglomerates, Construction & Engineering, Industrial Machinery, and Aerospace & Defense
No. 2 Consumer Discretionary = Strong RS – Buy. Groups expected to outperform: Leisure Products, Housewares & Specialties, Department Stores, Specialty Stores and Consumer Electronics
No. 3 Information Technology = Good RS – Buy. Groups expected to outperform: Systems Software, Application Software, Office Electronics, Data Processing & Outsourced Services, Computer Hardware and Internet Software & Services
No. 4 Materials = Improving RS – Buy. Groups expected to outperform: Aluminum, Steel, and Metal & Glass Containers
No. 5 Financials = Improving RS – Buy. Groups expected to outperform: Asset Management & Custody Banks, Life & Health Insurance, Specialized Finance, and Insurance Brokers
No. 6 Health Care = Deteriorating RS – Hold. Groups expected to outperform: Health Care Distributors, Health Care Equipment, and Pharmaceuticals
No. 7 Energy = Weak RS – Hold. Groups expected to outperform: Oil & Gas Drilling, Integrated Oil & Gas, and Oil & Gas Refining & Marketing
No. 8 Consumer Staples = Deteriorating RS – Hold. Groups expected to outperform: Agricultural Products, Distillers & Vintners, and Drug Retail
No. 9 Telecom = Poor RS – Hold. Groups expected to outperform: Wireless Telecom Services
No.10 Utilities = Weakest sector – Hold. Groups expected to outperform: Gas Utilities and Independent Power Producers
Got Questions? Ask Guido
Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.
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Evan R. Guido
Vice President of Private Wealth Management
One Sarasota Tower, Suite 1200
Two North Tamiami Trail
Sarasota, FL 34236-4702
941-906-2829 Direct Line
888 366-6603 Toll Free
941 366-6193 Fax
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