Weekly Market Notes
March 3, 2014
Dow 16321 – S&P 500 1859
The popular stock market averages gained 1.5% last week. The good performance occurred against a negative backdrop of war drums in Europe and disappointing economic data at home. A combination of factors allowed stocks to continue to rise including strong money flows into equity mutual funds and ETFs. Investors were also impressed by a statement from Janet Yellen before Congress last week that economic data had been surprisingly weak for the past six weeks.
This raised the prospects for a delay in Fed tapering at the March 18 and 19 meeting of the Open Market Policy Committee. Yellen’s comments also secured the prospects that short-term interest rates would remain at zero for a considerable period of time. Over the weekend investor concerns about the Russian/Ukraine situation ratcheted higher. In Sunday night trading the S&P 500 futures are down more than 1%. Gold, which often thrives during periods of investor anxiety, is higher by a like amount. The past four years the markets have, except for very brief periods of time, ignored geopolitical trouble. As a result, we anticipate the financial markets will eventually look past the Russian conflict. Support using the S&P 500 is in the vicinity of 1810 to 1825. Investors should focus on the strongest sectors including health care, information technology and materials.
The technical picture is mixed with optimism again creeping back into the markets. The CBOE Volatility Index (VIX) hovered near 14 for most of the five day period. At previous short-term peaks in the stock market the VIX drifted below 12. The survey from the American Association of Individual Investors found the bears falling to 21%, which is a low reading historically, suggesting too few bears. This is also found in the report from Investors Intelligence (II), which shows the bearish camp remaining at a very low level historically. More worrisome, the bulls in the II report jumped to 53%. A reading above 55% has often signaled trouble for stocks. The latest numbers from the National Association of Active Investment Managers shows a return to near fully invested positions by this group of investors.
Counterbalancing the sentiment data is the fact that the February rally broadened out considerably last week. The percentage of S&P 500 industry groups in uptrends expanded to 76% from 68% the previous week. Furthermore, the NYSE advance/decline line recorded another new high. We are also impressed by the fact that the S&P 500 Index joined the Russell 2000, the S&P Mid-Cap 400 and the NASDAQ in new all-time record highs last week. The improvement in market breadth argues that once the problems overseas become fully discounted, the current rally could continue into the second quarter.
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The latest economic data shows the U.S. economy struggling to find traction. The weak data we believe is the result of the harsh winter. The true state of the economy will unfold as weather conditions improve in March and April. Real fourth quarter GDP was revised down last week to 2.4% from 3.2%. Consumer spending was conspicuous by its absence late last year. Real final sales to domestic purchasers were revised down to a 1.2% annual rate. Consumer spending at this stage of the recovery is weak by most historical measures. A downward revision in exports combined with weak consumer spending accounted for most of the adjustment to fourth quarter results. Business activity, in the seven Federal Reserve regions, was soft in six of the economic zones, with only the Chicago region showing a gain month-over-month. Worrisome is the fact that in regions where weather was not a factor business conditions were weak. This argues that today’s ISM Manufacturing Report could show growth slowing further. Surprisingly, consumer sentiment improved in February. The Reuters/University of Michigan Consumer Sentiment Index rose 0.4 points in February.
Durable goods orders fell in January. Non-defense capital goods orders climbed 1.7% in the first month of 2014. Nevertheless, durable goods and capital goods orders have trended down the past three months and are below levels seen historically at this stage of the business cycle. In separate reports, new home sales rose almost 10% in January. It was the first increase in new home sales in three months. Existing home sales, which account for 90% of total home sales, fell for the fifth time in the past six months, hitting the lowest level since the summer of 2012. Housing has been negatively impacted by rising mortgage rates and higher home prices. Since the start of the year, however, the yield on the benchmark 10-year Treasury note has fallen from 3.00% to 2.65% on Friday. This should translate into lower mortgage rates during the Spring selling season. We anticipate that the interest rate on the 10-year T-note will remain relatively low, with the yield ranging from 2.50% to 3.25% for most of 2014.
The most significant economic data this week includes Monday’s report on the ISM Manufacturing Index, which is anticipated to show a small month-over-month decline. The February Employment Report due Friday is expected to show the economy created 145,000 jobs last month. The unemployment rate is anticipated to remain at 6.6%.
Sector Rankings and Recommendations
No. 1 Health Care = Strongest sector – Buy. Groups expected to outperform: Health Care Distributors, Health Care Services, Biotechnology and Health Care Facilities
No. 2 Information Technology = Strong RS – Buy. Groups expected to outperform: IT Consulting & Other Services, Data Processing & Outsourced Services, Application Software, Communications Equipment, Computer Storage & Peripherals, Electronic Equipment Manufacturers and Home Entertainment Software
No. 3 Materials = Gaining in RS – Buy. Groups expected to outperform: Diversified Chemicals, Aluminum, Paper Products, and Construction Materials
No. 4 Industrials = Strong RS - Hold. Groups expected to outperform: Aerospace & Defense, Building Products, Construction & Farm Machinery, Employment Services, Railroads and Airlines
No. 5 Consumer Discretionary = Improving RS – Hold. Groups expected to outperform: Homebuilding, Specialized Consumer Services, Automotive Retail, Hotels Resorts & Cruise Lines and Casinos & Gaming
No. 6 Utilities = Drop in RS – Buy on weakness. Groups expected to outperform: Gas Utilities, Electric Utilities
No. 7 Energy = Weak RS – Hold. Groups expected to outperform: Oil & Gas Storage & Transportation and Oil & Gas Refining & Marketing
No. 8 Financials = Falling RS – Hold. Groups expected to outperform: Diversified Banks, Regional Banks, Thrifts & Mortgage Finance and REITs
No. 9 Consumer Staples = Poor RS – Hold. Groups expected to outperform: Drug Retail and Distillers & Vintners
No.10 Telecom = Weakest sector – Hold. Groups expected to outperform: Wireless Telecom Services
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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