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FactSet StreetAccount Summary - US Weekly Recap: Dow (1.52%), S&P (1.58%), Nasdaq (0.73%), Russell 2000 (1.29%)

Mar 6, 2015
  • US equities finished lower this week. A big chunk of the pullback came on Friday, when a larger-than-expected increase in February payrolls underpinned expectations for a mid-2015 liftoff. In terms of perceived overhangs outside of the policy dynamic, there continued to be some focus on stretched valuations in combination with negative earnings revisions. While the global policy divergence theme remained in the headlines throughout the week, it continued to have a much bigger impact on Europe. In addition there was little overall direction for stocks from a fairly busy week of macro and geopolitical newsflow. There did not seem to be anything particularly incremental in this week's corporate newsflow. The pharma/biotech M&A theme continued, retail takeaways were fairly company specific, commodity exposure remained a big headwind, all firms passed the Fed's stress tests as expected and both aggressive buyback activity and better capex trends received some attention in the press. Sector performance for the week was largely driven by the policy influences (rates and FX) in play on Friday. Defensive sectors like utilities, telecom and consumer staples underperformed. Financials held up the best, but still finished lower.
Payrolls underpin mid-2015 liftoff expectations:
  • The most widely anticipated event of the week, the February employment report, was the big headwind for stocks (and bonds). Nonfarm payrolls rose 295K last month, ahead of consensus expectations of 235-240K. This put the three-month average at 288K. Gains were broad-based and there were no signs of a weather-related drag as both construction and leisure and hospitality posted solid gains and the workweek was unchanged for a fifth straight month. In addition, the unemployment rate fell to 5.5% from 5.7%, below the 5.6% consensus. While lower participation played a role, JPMorgan noted that broader measures of labor underutilization showed even greater improvement. The big disappointment from the report was the 0.1% m/m increase in average hourly earnings that left the y/y rate up just 2.0%. The Street was looking for a 0.2% gain after an outsized 0.5% increase in January. While earnings were widely expected to be the more important input for the liftoff timing debate, the overall momentum in the labor market recovery reinforced the likelihood that the Fed will change its forward guidance next month and provided further support for a mid-2015 tightening (and continued to leave the door open for a move in June).
Beyond policy implications?:
  • The stronger-than-expected February employment report weighed on stocks on Friday amid concerns about the signals from other markets. A sharp selloff in Treasuries that left the 10-year note up ~25 bp for the week at 2.24% not only put the focus on a near-term liftoff, but also renewed concerns about the disconnect between markets and Fed officials over the path of policy normalization. The accompanying strength in the dollar (dollar index up ~2.5% this week) was another factor given the extent to which FX headwinds have impacted guidance and sell-side revision activity. In terms of the overhangs this week outside of the policy implications from the February employment report, valuation continued to get some attention. According to FactSet, the forward 12-month P/E ratio for the S&P 500 stood at 17.1x going into Friday, well above the five-year and ten-year averages. The earnings component attracted some scrutiny in the press with the Street now looking for y/y declines in earnings (and revenues) for both Q1 and Q2. According to FactSet, Q1 and Q2 earnings are expected to decline 4.6% and 1.5%, respectively. At the start of the year, they were expected to grow 3.8% and 5.0%.
Europe still focal point of policy divergence theme:
  • Policy divergence remained a big theme this week, even before the February employment report. Europe continued to get the bulk of the attention. The euro remained under pressure, ending the week down ~3% against the dollar and hitting levels not seen in roughly 12 years. Eurozone bonds extended their rally as the ECB confirmed QE would start next week, Draghi was upbeat on the central bank's ability to source enough paper to achieve its balance sheet expansion target and noted that it would be a buyer down to the deposit rate of (0.2%). Peripheral debt outperformed, leaving several benchmark yields near record lows. Spreads narrowed vs comparable German paper. European stocks closed higher for a fifth straight week, putting the Euro Stoxx 50 Index up nearly 15% ytd. Flow dynamics continued to receive a lot of attention. According to BofA Merrill Lynch, European stocks attracted $4.3B in the latest week, marking the eighth straight week of inflows. It noted the $31B of inflows received over the past two months was the heaviest since December 2008 and in the 99th percentile. At the same time, it pointed out that US equities have seen outflows in eight of the past nine weeks.
Little direction from macro and geopolitical newsflow:
  • Macro and geopolitical newsflow was largely on the backburner for US equities this week. As widely expected, China used the annual National People's Congress (NPC) to lower its 2015 growth target to "around 7%" from "around 7.5%" last year (actual growth was 7.4%). Takeaways from the flurry of headlines out of the meetings seemed fairly mixed given the continued push and pull between growth and reform measures. Japan was largely off the radar, though there was more pushback against expectations for further monetary easing. Greece continued to get a lot of attention despite the recent de-risking from the bailout extension. There was more noise than news in the headlines about near-term financing and reform proposals ahead of next week's Eurogroup meeting. Iran was a big area of focus this week. In a widely anticipated speech to Congress, Israeli Prime Minister Netanyahu warned that the diplomatic solution currently under discussion would only serve to guarantee that Iran would acquire lots of nuclear weapons. However, the speech seemed to have little impact. Late in the week, there were reports that Tehran may be amenable to a ten-year moratorium on some aspects of its program demanded by President Obama.
Few new themes in corporate newsflow:
  • Some recent themes remained in play in this week's corporate newsflow. The pharma/biotech trend continued as PCYC +17.9% agreed to be acquired by ABBV (8%) in a cash-and-stock deal valued at ~$21B. While more retailers highlighted problems from West Coast port delays and adverse weather, takeaways from this week's updates still seemed to be fairly company specific. Expectations and sentiment also played a role in the accompanying stock price action. The adverse spillover effects from the commodity price reset remained in focus as JOY (11.9%) came under pressure on much weaker fiscal Q1 results and reduced F15 guidance. As expected, all 31 firms passed the Dodd-Frank Act Stress Tests. The big takeaway seemed to revolve around the lower stressed capital ratios for market sensitive money center and investment banks. This week also saw what are sometimes viewed as two competing corporate strategies get talked up in the press. The WSJ reported that big firms from a wide range of industries are finally starting to ramp up their capital spending. In addition, Bloomberg noted that S&P 500 buyback announcements jumped to a record $104.3B in February, nearly double the $55B in the year-earlier period.
Defensive sectors underperform:
  • The policy takeaways from the stronger February employment report on Friday had an outsized impact on sector performance this week. The utilities sector suffered its biggest weekly pullback since August of 2013 with the backup in rates. Telecom lagged throughout the week. RLECs underperformed, while T (3.1%) was hit by news on Friday it would come out of the DJIA. Some of the pressure on the consumer staples sector may have been a function of concerns about further dollar strength. Precious metals equities weighed on materials with the GDX (%12.7). Most industrial metals stocks also sold off. Both aluminum and steel names were hit by sell-side downgrades. Tech was a slight relative outperformer. M&A provided some reprieve for pockets of the semi group after FSL +10.8% agreed to be acquired by AVGO +0.2%. HDD names STX (6.9%) and WDC (4.2%) were among the worst performers on cautious comments out of BofA. Healthcare held up better than the tape. Hospital stocks were helped by the oral arguments in the Obamacare federal subsidies case in front of SCOTUS. THC +6.3% and CYH +4.7% led the move higher. The financials sector fared the best, though it still ended lower. Banks outperformed with the BKX +1%. Regionals led the move higher on rates, though BAC +2.6% was also underpinned by its stress test results.
Sector Performance (vs S&P 500):
  • Outperformers: Financials (0.55%), Consumer Disc. (0.79%), Healthcare (1.15%), Tech (1.43%)
  • Underperformers: Utilities (4.16%), Energy (2.92%), Telecom (2.80%), Consumer Spls. (2.61%), Materials (2.02%), Industrials (1.85%
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