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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.93%, S&P +0.37%, Nasdaq (0.04%), Russell 2000 +0.56%

May 8, 2015

Overview:

  • US equities finished mostly higher this week thanks to a big rally on Friday following the widely anticipated April employment report. Takeaways from the data were mixed, but suggested little change in the policy narrative. For the better part of the week, the big story continued to revolve around the backup in global bond yields, the difficulty in identifying the key drivers behind the move and the accompanying performance headwinds. It was another week in which the earnings calendar drove some of the more notable moves in the market, but had little impact on overall sentiment despite some positive sell-side commentary. The M&A and broader strategic actions theme also continued to dominate the headlines with the focus on the software, retail, social media, semi, biotech and chemicals groups. There were a number of different drivers behind sector performance, including rates. In terms of some of the other notable developments, there was little fallout from Fed Chair Yellen’s comments about “quite high” equity valuations. Headlines surrounding Greece were fairly volatile, but contagion remained limited. The Conservatives secured an unexpectedly decisive victory in the UK elections, though support on Friday was limited to sterling, the FTSE and gilts. While China saw its biggest weekly selloff in five years, it followed an eight-week winning streak in which the market jumped over 30%. 
Mixed takeaways from employment data drive Friday rally: 
  • The most widely anticipated event of the week proved to be bullish for both stocks and bonds. Nonfarm payrolls rose 223K in April, largely in line with consensus expectations. The unemployment rate slipped a tenth to 5.4%, as expected. The U-6 measure also declined a tenth to 10.8%, a new cycle low. However, some of the details looked soft. An already disappointing 126K increase originally reported for March was revised down to 85K, the smallest gain since June 2012. After posting a larger-than-expected 0.3% m/m gain in March, average hourly earnings growth was just 0.1% in April. This was below consensus expectations for a 0.2% gain and left the y/y rate of increase at 2.2%. The ability of both stocks and bonds to rally in the wake of the data seemed to support expectations surrounding a later liftoff and cautious start to the policy normalization process. The latter dynamic also received some attention this week with a Reuters article highlighting how the Fed is likely to be in no rush to shrink its balance sheet. While none of this marked a departure from the consensus, the recent backup in yields had still triggered some pockets of concerns about policy complacency. At the same time, the data also fit with expectations for some renewed recovery traction following a Q1 slowdown that was partly driven by a number of transitory headwinds. 

Global bond yield backup dominates headlines:

  • The big story throughout the better part of the week was the continued backup in global bond yields. Much of the focus was on the difficulty in fitting a narrative to the move. The go-to excuse continued to revolve around an unwinding of crowded positions in Eurozone bonds following the initial exuberance surrounding the ECB’s QE program. There was also more discussion about supply pressures and a lack of liquidity. While there seemed to be less focus on the role of expectations for a 2H pickup in global growth, there was more discussion about the influence of the sharp rebound in oil and the accompanying improvement in inflation expectations. The severity of the moves in bonds, currencies (particularly the euro) and oil drove concerns about hedge fund performance, which played into the broader risk-off sentiment highlighted by flow data. According to BofA Merrill Lynch, this week saw ~$20B of outflows from equity and high yield, the biggest of 2015. It added that US equity funds saw their biggest outflows since 2014, while Europe snapped a 17-week winning streak. In addition, Lipper data showed the biggest weekly outflow from US taxable bonds of the year. While positioning received so much of the blame for the severity of the macro unwinds, it also seemed to fit with signs of a pain trade to the upside in both stocks and bonds after the sweet spot hit by the April employment report on Friday. 

S&P 500 earnings now on track for Q1 growth:

  • The earnings calendar continued to drive a lot of the more notable single stock price action this week, though its influence on broader market sentiment remained limited. This was despite the fact that according to FactSet’s latest Earnings Insight report, with nearly 90% of companies having now reported, the blended growth rate for S&P 500 EPS stands at 0.1%. This represents a marked improvement from the (4.7%) expected at the end of the quarter. The seeming lack of enthusiasm surrounding the 6.4% positive surprise rate, which is ahead of the 5.4% five-year average and the best since Q1 2011, has likely been a function of the outsized reset in consensus expectations that took place during the quarter. However, Morgan Stanley had some positive commentary on earnings. It noted that during the past month, 2015 S&P 500 earnings estimates have been revised up by 0.3%, suggesting that the bar has been sufficiently lowered. It also pointed out that while energy estimates were revised down sharply due to the oil collapse, there have not been the commensurate upward revisions in consumer discretionary. It added that despite all the talk of wage pressure, there has been little corporate commentary on the matter. There have also been recent thoughts on the Street that wage fears are misguided in the first place. BofA Merrill Lynch noted that real wages are positively correlated with margins, while Citi said S&P 500 profits typically grow faster when labor compensation climbs. 

M&A theme continues:

  • While largely overshadowed by macro, the M&A theme continued to be cited as supportive for sentiment. YELP +25.6% was a standout following a WSJ report that it is exploring a sale. Analysts noted that its dominant position in local advertising should attract a number of suitors. The chemicals space was back in focus as SYT +10.1% rejected a $45B takeover approach from MON +2%. However, given the strategic merits of the deal, another offer seems to be widely expected. In retail, ANN +2.9% was boosted by a Reuters report that Golden Gate Capital, a nearly 10% shareholder in the company, was in talks to take it private in a deal valued at ~$2B. It was another volatile week of headlines surrounding CRM (1.3%). Bloomberg said that MSFT (1.9%) was considering an offer after the company was approached by another would-be suitor. However, a subsequent report from Reuters said that MSFT believes the valuation is too high. MGI +18.7% was another beneficiary of takeover talk in the press, though WU +3.2% did say it is not in discussions about consolidation. It was not all about deal speculation this week as GEVA +116.3% agreed to be acquired by ALXN (5.5%) for $8.4B in cash and stock in a deal that provided some reprieve for biotech. 

Financials outperform, energy weaker:

  • Financials put in the best performance this week. Some of the support came from the banking sector with the BKX +1.5% partly underpinned by the higher rate environment (and steeper curve). JPM +3% and BAC +2.1% were some of the standouts. Healthcare outperformed as earnings provided a tailwind for managed care and biotech recovered some of the 5%+ selloff from the prior week with the BTK +2.7%. Along with M&A, BIIB +4% outperformed with help from its $5B buyback. Consumer staples beat the tape on the strength in tobacco with RAI +3.3% and MO +3%. Materials outperformed as pockets of strength in chemicals and steel stocks offset some weakness in the aluminum, containerboard and precious metals groups. Industrials found some support from building and construction materials stocks, along with E&C and HVAC plays. Consumer discretionary was a slight laggard despite the ~1.5% gain in the S&P Retail Index. Apparel and accessories and media stocks underperformed. FOSL (6.4%) and NWSA (5.6%) were some of the notable earnings decliners. Tech ended lower with a number of hardware and other PC related names on the defensive. MU (6.2%) was a big decliner in the semi space. Rates seemed to be the overhang on utilities. E&Ps drove the weakness in energy with the EPX (3.2%). Telecom put in the worst performance with RLECs hit on earnings. 

Sector Performance (vs S&P 500):

  • Outperformers: Financials +1.59%, Healthcare +1.02%, Consumer Spls. +0.75%, Materials +0.61%, Industrials +0.41%
  • Underperformers: Telecom (1.44%), Energy (1.15%), Utilities (0.98%), Tech (0.23%), Consumer Disc. +0.30%

FactSet StreetAccount provides financial professionals with real-time, equity market intelligence. Request a free trial at solutions.factset.com/sa_trial.

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