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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.64%, S&P +0.75%, Nasdaq +1.30%, Russell 2000 +1.55%

Jun 19, 2015
Overview:
  • US equities finished higher this week. The S&P 500 recorded its biggest weekly gain since late April. There was no specific catalyst for the move, though some dovish leaning takeaways from Wednesday’s FOMC announcements received a lot of credit. This played into thoughts that a recent pickup in uncertainty surrounding policy normalization had driven a sufficient reset in risk sentiment that left the path of least resistance to the upside. One of the other notable stories this week was the lack of contagion from the latest ramp in “Grexit” concerns. However, there continued to be hope for some kind of last-minute political solution. A big selloff in China stocks also had minimal impact on global markets. It was a quiet week on the corporate calendar with largely company- and industry-specific takeaways from the May quarter reporters and June quarter guidance updates. In terms of M&A, a lot of the focus continued to revolve around the likelihood of a consolidation wave in the managed care space. This helped drive some of the outperformance in the healthcare sector. The consumer staples and utilities sectors, where investors have been underweight, also rallied. Energy put in the worst performance, while financials lagged as the banking group lost momentum.
FOMC takeaways a bit more dovish:
  • Wednesday’s FOMC announcements were the highlight of the week. As expected, the Fed left policy unchanged. The FOMC statement featured an upgrade of the economic assessment and noted some slack has diminished from the labor market. Not surprisingly, there were few other changes and no explicit reference to liftoff timing. Forward guidance language reiterated that liftoff remains conditional on further improvement in the labor market and reasonable confidence that inflation will move back to its 2% objective over the medium term. Much of the focus was on the SEP and particularly the dot plot. While the median funds rate for 2015 remained unchanged at 0.625%, five officials are now looking for just 25 bp worth of tightening this year (there was speculation Fed Chair Yellen is in this camp), up from one in March. In addition, the median funds rate for 2016 fell to 1.625% from 1.875%, while 2017 shifted down to 2.875% from 3.125%. This all provided further support for expectations of a very gradual policy normalization process, particularly in the early phases. In line with her recent speeches, Fed Chair Yellen took a fairly balanced approach during her press conference.
Path of least resistance higher:
  • The heightened prospects for the Fed to tighten just once in 2015 seemed to offer some reprieve for sentiment given the concerns about the potential signals from the recent big backup in global bond yields. That pickup in risk aversion was highlighted by the June BofA Merrill Lynch Global Fund Manager Survey out early this week, which showed that cash levels spiked to a six-month high of 4.9%, representing a contrarian buy signal. It also pointed out that a record percentage of investors have taken out protection against a fall in equities over the next three months. It added that equity allocation fell to a net 38% overweight, an eight-month low and just 0.3 standard deviations above the long-term average. The separate “Flow Show” report from BofA Merrill Lynch on Friday fit with the better risk sentiment surrounding policy normalization. It showed the fourth-biggest bond-to-equity rotation in six years. In addition, equity inflows of $10.8B were the largest in three months, while the $6B that went into US stocks was the biggest in 13 weeks. European equities saw their biggest inflows in four weeks, while Japan remained a preferred destination, with inflows to stocks in 16 out of the past 17 weeks.
No Greek contagion:
  • “Grexit” fears were back in the headlines this week. There was no progress towards a deal at Thursday’s Eurogroup meeting. However, nothing was really expected given that Greece remained adamant that it would not accept any agreement that involved pension reform or failed to provide debt relief. Liquidity concerns moved to the forefront with reports that Greek banks had suffered more than €4B of outflows this week alone. The ECB raised ELA for Greek banks by €1.1B on Wednesday and then another reported €1.8B following an unscheduled teleconference on Friday. Despite the heightened concerns, there were few signs of contagion. This seemed to be a function of several different dynamics. Perhaps most importantly, consensus expectations continued to revolve around a last-minute political solution at an emergency leader’s meeting scheduled for Monday (most likely in the form of an extension of the current bailout program). In addition, there was another batch of articles highlighting how the Eurozone economy and banking system are much better prepared this time around to deal with a Greek exit (particularly given ECB QE).
Few new macro takeaways from the corporate calendar:
  • Many of the companies that reported May quarter results or were out with June quarter guidance this week underperformed. However, takeaways were largely company- and industry-specific. Results from ORCL (6.2%) were adversely impacted by its Cloud transition. While ADBE (0.2%) beat on the key Creative Cloud subscriber growth metric, guidance was light on FX headwinds. FDX (4.2%) missed on earnings as weaker profitability in Ground and Freight offset a margin-driven beat from Express. ATU (0.9%) reported a worse-than-expected 8% decline in organic sales, while revenue and profitability were weaker in both the Industrial and Energy segments and the company guided well below the Street for the August quarter. OSK (11.8%) guided below consensus for fiscal Q3 (June) and reduced its full-year outlook. Access equipment segment weakness was cited as a drag, along with product launch delays and potential rental industry consolidation. NUE (2.2%) guided Q2 EPS 25% below consensus as weaker prices have pressured margins. In the oil services space, OIS (8.3%) cut its outlook for Q2 well site services revenue and margins on the back of the continued decline in the US land rig drilling count.
M&A headlines focus on managed care:
  • The M&A theme this week largely revolved around another wave of speculation surrounding consolidation in managed are. The WSJ reported that CI +13.1% had rejected a $45B takeover offer from ANTM +2.7%. The paper also said that UNH +2.3% was considering an acquisition of CI. It added that UNH had also approached AET +7.1% about a takeover, though it was unclear what, if any, the response was. In addition, Bloomberg said that AET was considering a bid for HUM (4.8%). Recall that it was a report late last month that said HUM had received takeover interest from potential buyers, including AET and CI, that kicked off the recent frenzy. In terms of Street takeaways, most analysts seemed to view ANTM as the most likely acquirer for CI given the potential for it to build out its offerings in Large Group/ASO, Medicare and International. AET was highlighted as a more logical acquirer of HUM given medical cost synergy opportunities, though valuation was mentioned as potential stumbling block. However, a WSJ Heard on the Street column argued that HUM was unlikely to be left out of the consolidation push. While analysts said UNH could be a serious buyer for either or CI or AET, they also talked up the company’s favorable internal growth prospects and standalone scale.
Healthcare, consumer stocks lead market higher:
  • Healthcare put in the best performance on broad-based strength. Biotech was a standout with NBI +3.8%. Hospitals rallied despite the uncertainty surrounding the upcoming SCOTUS decision on King v. Burwell with CYH +4.7%, UHS +3.4% and HCA +2.4%. M&A speculation helped managed care. EW +9.4% was a standout in the med-tech/device group on the back of earlier-than-expected FDA approval for its SAPIEN 3 Transcatheter Heart Valve (THV). The consumer staples sector rallied. Supportive factors included underweight positioning, M&A, shareholder activism, positive sell-side commentary and lower rates. COTY +20.5% was a big gainer on a NY Post report that it had won the auction to buy three beauty businesses from PG +2.1% for ~$12B. CAG +13.8% was underpinned by Jana’s disclosure that it had acquired a 7.2% stake in the company. The fund expressed concern about significant shareholder value underperformance since the $5B Ralcorp acquisition in January 2013. Consumer discretionary beat the tape. Homebuilders had a good week with KBH +9.8% the standout following its well-received Q2 results and outlook commentary, particularly surrounding margins. Utilities, another sector where investors have been underweight, also outperformed.
Energy weaker, banks lose momentum:
  • Energy fared the worst this week. The oil services group was a notable underperformer with the OSX (3%). E&Ps also came under some pressure with the EPX (1.8%). Financials also ended down for the week. The banking group was a drag with the BKX (0.9%). BAC (1.8%), C (1.5%), HBAN (1.4%) and RF (1.3%) were some of the weaker names. The dovish Fed takeaways and lower rate backdrop dampened some of the recent momentum. Tech underperformed, though not much really stood out from an end-market perspective. While RHT +1.4% fared well, most of the higher-profile reporters this week were weaker following earnings. In addition, despite the outperformance of the semi group with the SOX +1.3%, sentiment surrounding memory names SNDK (3.3%) and MU (2.6%) remained lackluster. The industrials sector failed to keep up with the tape. A number of machinery names came under outsized pressure, including TEX (3.1%). Multis were mixed. HVAC name LII (4.1%) was one of the bigger decliners. Several distributors rallied, including FAST +2.3% and GWW +1.7%. The industrial metals group was an overhang on the materials sector. Steel names sold off with AKS (7.3%) leading the move down. Most aluminum names underperformed.
Sector Performance (vs S&P 500):
  • Outperformers: Healthcare +2.01%, Consumer Spls. +1.92%, Consumer Disc. +1.57%, Utilities +1.47%
  • Underperformers: Financials (0.09%), Industrials +0.01%, Tech +0.27%, Energy (0.46%), Telecom +0.64%, Materials +0.60
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