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FactSet StreetAccount Summary - US Weekly Recap: Dow +0.69%, S&P +1.16%, Nasdaq +0.78%, Russell 2000 +1.03%

Jul 31, 2015
Overview:
  • US equities finished higher this week following one of the bigger weekly pullbacks of 2015 in the prior week. Earnings continued to get most of the attention. However, there was little change surrounding higher-profile themes such as the negative spillover effects from oil, sluggish capex trends, FX headwinds, emerging market/China weakness, restructuring, expense control, lower input costs and pockets of consumer strength. This week also saw some continued traction behind the M&A, shareholder activism and strategic actions themes. There was a good deal of volatility surrounding the latest macro developments. Much of the focus was on the seemingly conflicting takeaways for the September vs. December liftoff debate from the FOMC statement and Q2 GDP and ECI data. China remained under scrutiny with the renewed selling pressure in equities and debate about the extent to which its economic slowdown should impact global growth and commodity sentiment. There were some mixed read-throughs for risk and recovery sentiment from both the latest flow data and sector performance. The utilities sector was the best performer, posting its biggest weekly gain in over four months. A few cyclical/momentum plays rebounded following last week’s scrutiny. Energy was the only sector to finish lower with another selloff in oil.
Earnings themes remain (mostly) the same:
  • This week’s flurry of earnings reports offered few surprises from a thematic perspective. Industrial results and guidance continued to be adversely impacted by a sluggish macro backdrop, oil and gas headwinds and weaker capital spending trends. Some of the laggards this week included IR (7%), OSK (3.9%) and ROP (2.8%), though a number of other reporters fared better with these themes so widely hashed out already (and some help from an oversold bounce on Tuesday). Oil weakness was also in focus with the disappointing results from CVX (2.3%) and XOM (0.9%). Once again, the expectations dynamic seemed to overshadow fundamentals in a number of cases, including WDC +11.4%, SPW +2.7%, WYNN +0.8%, FB (3%) and DATA (17.8%). Results/guidance out of the semi space were somewhat better than feared (a lower bar helped), though continued to point to a slowing fundamental backdrop. There were some signs of better sentiment surrounding the consumer with both BWLD +15.3% and PNRA +11.3% highlighting stronger quarter-to-date comp trends. F +3.1% and GM +1.5% also fared better with help from NA strength. However, in the HPC space, results/guidance from PG (4.5%) highlighted a still-weak organic growth environment.
Healthcare remains focal point for M&A:
  • The M&A theme continued to be viewed as tailwind for broader market sentiment this week. Much of the focus remained on the healthcare sector where global M&A is up over 40% y/y and already just below the annual record of $429.3B set last year. TEVA +11.6% agreed to acquire the generic-drug business from AGN +7.4% for $40.5B in cash and stock in a deal that is expected to be significantly accretive next year. Both the Street and press also highlighted the potential for a continued pickup in M&A activity, with PFE +5.3% and GILD +4.5% mentioned as potential drivers of transformative deals. AMGN +11.4% and ABBV +2.8%, both valued at over $120B, were cited as potential targets in an FT article. Outside of healthcare, HON +2.2% agreed to acquire Elster Group from the UK’s Melrose Industries for $5.1B in cash. The deal fit with a broader multi-industrial segment push to help bolster sluggish top-line trends through M&A, along with efforts to put trapped overseas cash to work. In the chemicals space, CYT +27.2% agreed to be acquired by Solvay for $5.5B in cash. OWW +1.4% was helped by a NY Post report that the DoJ is likely to approve its takeover by online travel rival EXPE +14.9% (which rallied on earnings).
Shareholder activism in tech, strategic actions in staples:
  • Following a major restructuring announcement last week from QCOM +4.5% in the wake of pressure from Jana Partners, activists secured another victory in the tech sector this week. CTXS +9.1% announced a flurry of corporate actions in response to demands from Elliott Management, which had recently acquired a ~7.5% stake in the company. These included the pending departure of the CEO, a review of strategic alternatives for the GoTo business and ByteMobile, the formation of a new committee to review the company’s opex and capital structure and a cooperation agreement with Elliott that will give the fund one board seat and discretion over another. Portfolio restructuring news was not just activist driven this week. SVU +24.8% was a big outperformer after announcing plans to explore a separation of Save-A-Lot, its national hard discount retailer with over 1,300 total stores. Analysts were positive on the announcement (and some signs of stabilization in the core business), with the stock catching upgrades at both Morgan Stanley and Telsey Advisory Group.
Liftoff timing debate heats up:
  • There was some volatility surrounding the liftoff timing debate this week, though the impact on equities was fairly muted compared to Treasuries (and to a less extent, the dollar). As expected, the July FOMC statement contained few changes and did not signal a bias toward a September rate hike. However, there was a bit more hawkish spin surrounding the upgrade of the Committee’s labor market assessment and the notion that it now only needs to see “some further improvement in the labor market” before increasing rates. This marked a slight tweak from the prior statement that highlighted the need to see “further improvement”. The September liftoff camp also seemed to get some support from the Q2 GDP data. While GDP expanded a less than expected 2.3%, Q1 saw a nice upward revision and inflation came in firmer than expected with the PCE deflator up 1.8% annualized and up 1.3% y/y. However, the risk of a later liftoff was back in focus on Friday, driving a big rally in Treasuries. The Employment Cost Index (ECI) increased 0.2% q/q in Q2, well below expectations for a 0.6% increase and the weakest reading on record. Wages and salaries increased just 0.2%, bringing the annual growth rate down to 2.1% from 2.6% in Q1.
Mixed read-throughs from flow data:
  • There were some mixed read-throughs from flow data out this week. The latest “Flow Show” report from BofA Merrill Lynch noted support for near-term liftoff expectations with redemptions in emerging market equities and yield plays such as MLPs, REITs and junk bond funds, the latter of which saw their largest outflows in four weeks. At the same time however, high yield has also been impacted by the renewed selling pressure in oil that has been a driver of global growth and disinflation fears. These fears have also played a role in emerging market weakness. Treasuries remained in favor with a fourth straight week of net inflows. A Bloomberg article pointed out that demand for the $90B of paper auctioned this week was the most since January. In addition, there did not seem to be any concerns about the potential pressure from Fed tightening on momentum play multiples as healthcare/biotech continued to attract fresh capital. However, precious metals funds did see their largest outflows since December 2013. The policy divergence theme was also supported by a continued preference for European and Japanese equities over their US counterparts.
Utilities outperform, energy lags:
  • The utilities sector rallied, posting its biggest weekly gain in over four months. The lower rate backdrop helped, though there were no signs of any meaningful defensive positioning. In addition, a few cyclical and momentum plays that were under scrutiny last week rebounded. The industrials sector was a big gainer on fairly broad-based strength. M&A and earnings drove the renewed outperformance in healthcare. A rebound in industrial metals boosted the materials sector. Steel names led the way on better 2H commentary and this week’s trade case filing. Consumer discretionary outperformed with strength in the restaurant, homebuilder and auto groups. Consumer staples was largely in line with the food group a standout. Tech lagged with some of the mixed takeaways from the earnings calendar. The financials also underperformed as banks continued to give back some big gains from earlier in the earnings season. Energy ended lower for a 13th straight week despite a big bounce on Tuesday and Wednesday. A lot of the damage was down by a selloff in oil on Friday that left WTI and Brent down ~2.5% and ~5%, respectively, for the week (and down ~21% and ~18% for July).
Sector Performance (vs S&P 500):
  • Outperformers: Utilities +3.87%, Industrials +2.45%, Healthcare +2.27%, Materials +1.97%, Consumer Disc. +1.72%, Telecom +1.33%
  • Underperformers: Energy (0.43%), Financials +0.13%, Tech +0.28%, Consumer Spls. +1.09%
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