Baird

Weekly Market Notes
May 6, 2013
Dow 14973 – S&P 500 1614

The equity markets found another gear last week with virtually all domestic indices soaring to new all-time peaks. Continued strength in housing and auto sales coupled with the better than expected jobs data last week helped restore confidence that the economy, while far from escape velocity, is stable.  Stocks typically do best when the economy is dragging its feet as inflation pressures are anchored and interest rates remain low. When the Bernanke ‘put’ is added to the mix the backdrop for the stock market is bullish.

Consequently, we anticipate the positive trend in the equity markets to continue into the summer months. If the advance in the stock market is to continue long term it will be critical the economy gain positive momentum. Corporate earnings stalled in 2012 and many companies are struggling to find incremental sales. A shift in leadership from defensive sectors to aggressive sectors would suggest the economy is gaining traction. The fact that aggressive sectors led the market advance the past two weeks is an important first step.

Last week’s rally brought with it significant improvement in the technical indicators. Minor divergences were quickly overcome as lagging areas of the market jumped to new highs along with the S&P 500 and Dow Industrials. Small and mid-cap indices regained lost momentum and soared to new highs. Although the Dow Transports did not register a new high last week, the Index is within striking distance of a new high. 

Last week’s move was broad based with 85% of the S&P 500 industry groups now in confirmed uptrends signifying that most areas of the market are in harmony with the primary trend. Investor sentiment moved towards more optimism last week but remain a distance from levels considered extreme. The survey by the American Association of Individual Investors (AAII) stands out as the exception to the overall sentiment statistics. The fact that AAII data shows more bears than bulls with the averages at new all-time record highs is quite unusual and using contrary opinion suggests stocks have more room on the upside.

While Friday’s employment report was widely celebrated in the financial markets, the overall message from the economic data over the past week is one of continued caution. Although the jobs report was not as strong as the headline numbers suggest, the fact that expectations were for much less led to the robust greeting last Friday.  The nonfarm payrolls rose by 176,000 in April, and upward revisions to the previous two months added another 114,000 jobs. This helped turn the previously reported 88,000-job gain in March into a more respectable gain of 138,000 jobs.

The bulk of the job gains in April came from temp agencies and restaurants. Manufacturing employment was flat and construction employment declined. The average work week declined by two-tenths of an hour, and that fed a decline in the index of aggregate hours worked. The yearly change in the hours worked index has fallen back to its lowest level since late 2010. Wage growth remains subpar – rising 0.2% in April but only seeing a 1.5% annualized gain over the past three months. The bottom line is that there is little in the employment data that indicates that economic growth is on the cusp of sustained acceleration.

Business activity indicators released last week reveal an economy that has little upside momentum. Construction spending posted an unexpected 1.7% decline in March, while factor orders fell by a greater than expected 4.0% in March. The trend appears to have continued in April. While the ISM Manufacturing Report met expectations, it still slowed to a barely positive 50.7, down from 51.3 in March. The Non-Manufacturing Composite Index came in weaker than expected, falling from 54.4 to 53.1. Regional manufacturing surveys have also been soft, which was confirmed by last month’s jobs numbers. The 10-year Treasury note ended the week yielding 1.75% versus 1.67% the previous week. We continue to believe the yield on the benchmark T-note will move between 1.50% and 2.25% for the remainder of 2013.

Sector Rankings and Recommendations

No. 1 Health Care = Strongest sector – Buy. Groups expected to outperform: Biotechnology, Managed Health Care and Pharmaceuticals

No.2 Consumer Discretionary = Steady strong RS – Buy. Groups expected to outperform: Broadcast and Cable TV, Movies & Entertainment, Footwear, Home Furnishings, Household Appliances, Auto Parts & Equipment

No. 3 Utilities = Improving RS – Buy. Groups expected to outperform: Independent Power Producers, Multi-Utilities & Unregulated Power, and Electric Utilities

No. 4 Financials = Improving RS – Buy. Groups expected to outperform: Multi-line Insurance, REITs and Property & Casualty Insurance

No. 5 Consumer Staples = Good RS – Buy. Groups expected to outperform: Personal Products, Food Retail, Brewers, Soft Drinks and Drug Retail

No. 6 Telecom = Downtick in RS – Buy. Groups expected to outperform: Wireless Telecom Services

No. 7 Industrials = Deteriorating RS – Hold. Groups expected to outperform: Airlines, Railroads, Office Services and Supplies and Environmental Services

No. 8 Information Technology = Wait for top 5 RS ranking – Hold. Groups expected to outperform: Home Entertainment Software, Semiconductors, and Data Processing & Outsourced Services

No.9 Energy = Decline in RS – Hold. Groups expected to outperform: Oil and Gas Storage & Transport and Oil & Gas Exploration & Production

No.10 Materials = Weak RS – Hold. Groups expected to outperform: Paper Products, Diversified Chemicals, and Specialty Chemicals 

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. 

Evan R. Guido

Vice President of Private Wealth Management

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