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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.67%, S&P +0.63%, Nasdaq +1.27%, Russell 2000 +0.71%

Feb 20, 2015

Overview:

  • US equities finished mostly higher in fairly uneventful, holiday-shortened trading this week. The S&P 500 posted its third straight weekly gain, ending 6.5% above its recent low on 2-Feb. Most of the higher-profile stories had relatively little influence on the broader market. The drama surrounding Greece continued to dominate the headlines despite the limited directional takeaways for risk assets. However, a deal between Athens and the Eurozone did boost US stocks on Friday. The minutes from the January FOMC meeting had a slightly dovish tilt that underpinned Treasuries on Wednesday, though there did not seem to be any meaningful shift in policy normalization sentiment. While Wal-Mart’s decision to boost pay for a third of its workforce received a lot of attention, there was some debate about its potential to trigger broader wage increases. Despite more focus on the economic reverberations, the West Coast ports dispute remained relegated to the backburner. Q4 earnings season continued to wind down and while there were few aggregate takeaways, the calendar did drive many of this week’s outsized moves. Sector performance seemed to offer relatively read-through for risk/recovery sentiment. Healthcare fared the best with some upside leadership from biotech. Energy came under pressure with oil back on the defensive following a recent bounce.

Greece, Eurozone reach a deal:

  • Greece once again dominated the headlines for the better part of the week despite the fairly limited influence on US equities. However, stocks did get a lift on Friday after Athens secured a four-month extension of its loan agreement with the Eurogroup. This was less than the six months it had sought. In addition, Greece had to commit to a successful completion of the current bailout review and pledge not to roll back any reform measures that could have a negative impact on its finances or economic recovery. It also pledged to fully honor its existing debt obligations. Athens will have to continue to run a primary budget surplus, though the statement seemed to imply that targets could be lowered. While €10.9B of Eurozone funds for the recapitalization of Greek banks will still be available, the money will be held by the Eurozone bailout fund (rather than the Hellenic Financial Stability Fund as is now the case) and dispersed only at the request of the ECB. In terms of the next steps, there is still a bit of uncertainty as Greece has to submit a list of reforms on Monday that it plans to implement over the remainder of the rescue period. Provided that Greece’s creditors are satisfied with the measures, the extension will be ratified at another Eurogroup meeting on Tuesday. After that, where necessary, national parliaments will begin their approval process.

Slightly dovish tilt to January FOMC minutes:

  • There was a slightly dovish tilt to the January FOMC minutes with two particular areas of focus. One was that “many participants” believed the balance of risks associated with the timing of the beginning of policy normalization implied that the fed funds rate should be kept at its effective lower bound “for a longer time”. The other was that “many participants” also highlighted concerns that dropping the “patient” forward guidance language in the statement could risk shifting market expectations for initial policy firming to too narrow a range of dates. The minutes noted worries that this could trigger an overreaction in the markets, resulting in overly tight financial conditions. In addition, the minutes highlighted some concern about the heightened downside risks to inflation. While Treasuries rallied with the curve steepening, there still did not seem to be a meaningful shift in policy normalization sentiment. This was a function of several dynamics, including the widely discussed nuances surrounding the liftoff timing debate, the relatively upbeat economic assessment in the minutes, the fact that the meeting took place ahead of the release of a strong January employment report and the focus on Fed Chair Yellen’s congressional testimony next week.

Wal-Mart to raise wages:

  • Wal-Mart said this week that ~500K full- and part-time workers (about a third of its total workforce) will receive pay increases. Starting in April, hourly associates will earn at least $1.75 above the current federal minimum wage, or $9.00 per hour, representing a 38% increase. In addition, the following year, current associates will earn at least $10.00 per hour. The move came on the heels of Aetna’s announcement last month that it will push its minimum wage up 11% to $16 an hour starting in April. It also followed Gap’s decision last year to set its minimum wage at $9 an hour (and pledge to go to $10 in 2015), along with the announcement by Starbucks back in October that it would increase pay for all baristas and shift supervisors. This generated a lot of discussion in the press about how a tighter labor market seems to be forcing companies (particularly in the retail and restaurant industries) to start paying up to attract and retain workers. There also were thoughts that this dynamic could potentially create a virtuous circle given the propensity of lower-wage workers to spend such increases. However, there was some semblance of skepticism about the extent of the tailwind. This touched on a number of wide-ranging issues, including the fact that Wal-Mart pays less than the bulk of retailers, skills mismatches and the pressure on companies to continue to cut costs.

West Coast ports dispute headwinds:

  • While it appeared on Friday as if West Coast port operators and longshoremen were closer to a deal to end their nine-month contract dispute, the economic fallout received more and more attention this week. Much of the focus seemed to be on the retail industry. Wal-Mart noted the delays are hurting its business and threaten its spring and Easter inventory. A WSJ article also pointed out that Levi Strauss said it was concerned that it would not receive some products in time for spring deliveries. That report also noted that according to consulting firm Kurt Salmon, delays could cost retailers alone as much as $3.8B this year. It added that when considering rerouting, carrying costs and other expenses, the hit to retail could be $7B. The auto industry was also in focus. Honda announced on Friday that after reducing output at five North American factories in the week-ended 23-Feb by 20K vehicles due to a parts shortage, it would have to cut another ~5K cars from production in the following week. While Deutsche Bank had estimated the strife could result in a 100 bp net export drag on Q1 GDP, it noted that it was less sure about the impact after data released Wednesday revealed what it described as “massive” 23.5% and 39.1% respective y/y declines in January inbound loaded containers at the Port of Long Beach and Port of Oakland.

Earnings calendar drives notable movers:

  • The earnings calendar was not a directional driver for the broader market as aggregate takeaways have already been hashed out, though it did trigger some of the more notable single-stock price action. Despite the better comp/traffic trends and tailwind from lower gas prices, WMT (1.8%) underperformed with the drag on guidance from its new compensation structure and e-commerce investments. JWN +2.9% fared better as favorable top-line trends offset concerns about its investment cycle. PCLN +10.2% was one of the big gainers on solid bookings growth, with the International segment a particular bright spot given concerns about a potential deceleration. RevPAR and unit growth guidance upside helped MAR +4.5%. Better comps at Qdoba and Jack in the Box (JITB) and above-consensus guidance boosted JACK +12.5%. INTU +7.2% was underpinned by a better-than-feared start to the tax season and momentum in the Small Business segment (QBO). FOSL (13.5%) sold off sharply on concerns about negative NA trends and the upcoming launch of the Apple Watch. EOG (6.3%) was hit by lower-than-expected Q4 production and 2015 production guidance that was down at the midpoint compared to sell-side expectations for a LSD gain. The soft performance in the Mobile/Wireless segment weighed on MRVL (1.8%).

Healthcare outperforms, energy weak:

  • Healthcare was the best performing sector this week. Biotech provided some upside leadership with the BTK +3.8%. BSX +10% was another big gainer as its settlement with JNJ +0.6% removed a key overhang. M&A remained in focus with VRX +3.8% reportedly close to a deal to acquire SLXP +3.6%. The industrials sector also beat the tape on fairly broad-based strength. Airlines outperformed with DAL +6.6% and AAL +5.4%, while TEX +8.6% and WM +6.3% were some of the big gainers on earnings. There did not seem to be anything specific behind the outperformance in tech. Software had a good week. FEYE +9.2% led the move higher with more focus on cybersecurity spending. EMC +3.8% outperformed in hardware. 13F filings may have helped. AAPL +1.9% extended its recent outperformance. Materials outperformed despite the weakness in the bulk of the industrial and precious metals stocks. Restaurants, OTAs and retail underpinned consumer growth. WMT was the drag on the staples sector, though tobacco and a number of food names outperformed. Energy sold off after a big run-up over the past couple of weeks. Renewed selling pressure in oil was an overhang, along with news that both Buffett and Soros liquidated their positions in XOM (3.7%).

Sector Performance (vs S&P 500):

  • Outperformers: Healthcare +1.93%, Industrials +1.59%, Utilities +1.19%, Tech +1.18%, Materials +0.98%, Consumer Disc. +0.77%
  • Underperformers: Energy (2.38%), Telecom (1.36%), Financials +0.10%, Consumer Spls. +0.11%

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