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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.29%, S&P +0.29%, Nasdaq (0.09%), Russell 2000 +1.23%

Apr 2, 2015

Overview:

  • US equities finished mostly higher in fairly volatile, holiday-shortened trading this week. It was difficult to get a good feel for sentiment as liquidity was widely described as thin and there did not seem to be any meaningful developments surrounding a number of the higher-profile themes in the market. There was some positive sentiment early in the week from the dovish leanings of Fed Chair Yellen’s speech last Friday, though her comments about a likely gradual pace of policy normalization still fit with the consensus. There was also some semblance of a waiting game ahead of the March employment report, the next key input for the liftoff timing debate. Stocks will not get a chance to react to the data until Monday with the market closed for the Good Friday holiday. While this week saw some more disappointing economic data and a continued pickup in focus on a weak upcoming Q1 earnings season, headwinds from the oil price plunge, dollar strength, harsh winter weather and the West Coast ports slowdown have been widely discussed. Iran and Greece grabbed a lot of headlines, though their influence on global equities remained muted. Macro read-throughs from this week’s sector performance were limited. Energy, utilities and telecom were among the big gainers, while healthcare, tech and industrials all finished lower. 

Yellen perceived as more dovish, more China policy support:

  • While there did not seem to be any real surprises in a speech from Fed Chair Yellen shortly before the market closed last Friday, economist takeaways noted a more dovish tilt. The focus was largely on her comments that the tightening cycle would likely occur “at a gradual pace”. She also highlighted uncertainty surrounding the long-run equilibrium rate (and the lower market view), along with the risk the Fed could have to return to the zero bound if it moves too quickly. In addition she pointed out that the Fed could also get more traction on its 2% inflation target by letting the unemployment rate decline somewhat below its longer-run sustainable level. The comments were cited as a tailwind for Monday’s rally in stocks, along with the continued policy support dynamic in China. However, there was some skepticism behind such attribution given that Yellen’s remarks just played into the markets’ more dovish view of policy normalization, while China’s influence on global sentiment has been fairly limited. In addition, the focus on both Yellen and China seemed to represent an effort to fit a story to an outsized move that may have been more of a function of the bearish positioning coming out of last week’s selloff. 

More data disappointments, but waiting game for payrolls:

  • Growth concerns remained in focus, though they did not seem to be a meaningful overhang on sentiment this week. The ISM manufacturing index slipped to 51.5 in March from 52.9 in February, below the 52.5 consensus and the worst reading since May of 2013. The details were largely downbeat with new orders, new export orders and employment falling. However, the headwinds highlighted in respondent commentary such as the oil price decline, adverse weather, dollar strength and the West Coast ports slowdown have already been widely discussed. In addition, the much more important input for the policy debate continues to revolve around the labor market as the Fed recently highlighted the need to see further traction as one of the conditions for liftoff. This dynamic seemed to contribute to the directional struggles this week with the March employment report scheduled to be released on Friday when US equity markets are closed for holiday. The Street is looking for a 245K increase in March nonfarm payrolls following a 295K increase in February. The unemployment rate is expected to remain unchanged at 5.5%, while average hourly earnings are seen up 0.2% after a disappointing 0.1% increase last month. 

Earnings concerns vs. lower bar and 2H reacceleration:

  • According to FactSet (see the weekly Earnings Insight report for more), the Q1 bottom-up S&P 500 estimate dropped by 8.2% from $29.48 to $27.05 over the course of the quarter. This compares to the average decline of 4.3% over the past year and 4.8% over the last ten years. The Street is now looking for a 4.6% decline in Q1 S&P 500 earnings, well below the 4.3% growth expected at the start of the quarter. As was the case with the downward revisions to Q1 GDP estimates this week, there did not seem to be any notable additional pressure from the negative sentiment going into Q1 earnings season. This may have also partly been a function of the fact that FX and strong dollar headwinds are already widely understood. In addition, as has tended to be the case when there is a meaningful reset of estimates into earnings season, some of the focus has started to shift to both the lower bar and expectations for an out-quarter reacceleration in growth. While S&P 500 earnings are expected to decline 1.9% in Q2 (vs expectations for 5.3% growth at the start of the year), they are estimated to increase 1.6% in Q3 and 6.7% in Q4. 

Deal on Iran, little progress on Greece:

  • It was a busy week of newsflow surrounding negotiations both on a framework for an eventual deal on Iran’s nuclear program and a package of Greek reforms needed to unlock crucial funding support. However, while headlines drove some of the volatility this week, their impact on global equities was fairly muted. In terms of Iran, world powers and Iran agreed on the framework of a deal to constrain its nuclear program in exchange for the easing of sanctions. However, as expected, a number of key details were not addressed, including the process for re-instating sanctions if Iran does not live up to the terms of the deal. While deal prospects were a widely cited overhang on oil, there was no additional color on how quickly Iranian exports could return to the market. The Greek saga continued this week. While Greek officials talked up prospects for a reform/funding deal as early as next week, comments from European officials seemed more cautious. In addition, there continued to be concerns about Greece's resistance to addressing crucial issues such as a pension system overhaul and labor market liberalization. There were also more reports about Greece running out of money next week, though they were quickly denied by Athens. 

Defensive sectors among best performers:

  • Telecom and utilities were the two best performing sectors this week. While Treasuries also strengthened, there still did not seem to be a notable defensive rotation in the market. Energy also outperformed with some decoupling from another pullback in oil (though natural gas was stronger). Both E&Ps and oil services fared well with the EPX +4.6% and OSX +2.6%. Financials beat the tape as banks had a good week with the BKX +1.6%. Some support came from another round of articles highlighting the better Q1 trading backdrop. Sell-side preview commentary was not as upbeat, though some firms noted the negative sentiment already surrounding the group on worries about further NIM compression. The consumer sectors also outperformed. Nothing really stood out in consumer growth. The cable space was in focus with CHTR +5.3% driving the latest consolidation. There were also some pockets of strength in retail with JCP +19.7% a standout on positive sell-side commentary. The staples sector saw fairly broad-based gains. Tobacco names RAI +4% and LO +1.6% were helped by merger approval expectations (despite a NY Post article to the contrary). Most food names posted strong gains following last week’s M&A.. 

Healthcare lags despite M&A:

  • Healthcare was the worst performer despite another flurry of deal activity early in the week that according to Dealogic, helped drive a 108% y/y increase in Q1 sector M&A to $126.4B, the second-highest total for the period on record after 2009’s $136B. Following last week’s 5.3% selloff on the latest round of bubble fears, biotech came under pressure again with the NBI (2.3%). Goldman Sachs also highlighted a number of potential overhangs on the sector, including profit-taking following Q1’s outperformance, concerns about FX-driven negative preannouncements, limited clinical catalysts, seasonality, technicals and the buyback blackout period. Tech also finished lower this week. After falling 5% last week, semis put in a sluggish overall performance with the SOX (0.7%). INTC (3.7%) and ALTR (2.9%) gave back some of last Friday’s M&A speculation driven strength as no deal was announced this week. Large-cap Internet and social media names like GOOG (2.1%), YHOO (2.1%), FB (2.1%) and EBAY (1.3%) also underperformed. Airlines weighed on the industrials this week. UAL (8.7%), AAL (6.6%) and DAL (5.9%) were all downgraded at Deutsche Bank on concerns about international sales. International weakness was also evident in DAL’s update on Thursday. 

Sector Performance (vs S&P 500):

  • Outperformers: Telecom +1.64%, Utilities +1.63%, Energy +1.53%, Financials +1.06%, Consumer Disc. +0.99%, Consumer Spls. +0.76%, Materials +0.62% 
  • Underperformers: Healthcare (1.49%), Industrials (0.26%), Tech (0.30%)
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