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FactSet StreetAccount Summary - US Weekly Recap: Dow (5.82%), S&P (5.77%), Nasdaq (6.78%), Russell 2000 (4.61%)

Aug 21, 2015
Overview:
  • US equities came under significant pressure with the S&P 500 suffering its biggest weekly pullback since September 2011. A number of the usual suspects were behind the global risk-off trade. Most of the focus continued to revolve around concerns about the spillover effects from the growth slowdown and recent yuan devaluation in China. Emerging markets and commodities remained in the crosshairs and continued to trigger worries about imported deflation in the US. The lack of conviction surrounding the inflation outlook was perhaps the key takeaway from the July FOMC minutes. This raised the risk of a later liftoff, though it did not settle the debate, leaving the uncertainty dynamic as a big overhang on sentiment. A flurry of headlines surrounding positioning fit with the pickup in risk aversion this week. There were also concerns about the potential for further pressure on still-crowded positions in momentum plays. It was not all bad news this week. Housing data surprised to the upside, while there did not seem to be any new macro concerns out of the latest batch of July quarter reporters. Energy led the market lower with the selloff in oil. The utilities sector held up the best with the lower rate backdrop and defensive positioning.
China drives global growth fears:
  • The global growth fears widely cited for the risk-off trade this week continued to emanate from China, though there were relatively few incremental developments. The big one was the 77-month low in the August flash manufacturing PMI out on Friday. All five major components deteriorated on a sequential basis, with new orders the big drag. In addition, a Commerce Ministry official warned this week that export weakness would likely persist in the near term. Despite the stability in the yuan, last week’s devaluation continued to reverberate. Kazakhstan’s tenge lost more than 20% of its value after the central Asian country, a big exporter of oil and trading partner with both China and Russia, announced it would scrap its peg for a free float. In addition, Vietnam devalued the dong on Wednesday for the second time in just over the last week. Other Asian and commodity currencies also continued to underperform this week. China fears also revolved around the continued deterioration in confidence surrounding the government’s policy response. In addition, there were reports highlighting concerns about a pickup in labor and social unrest, with the latter related to the Tianjin explosion.
Fed minutes fuel liftoff uncertainty:
  • Takeaways from the July FOMC minutes out this week tilted to the dovish side with much of the focus on the lack of conviction in the inflation outlook. The minutes noted that almost all members indicated they would need to see more evidence that economic growth was strong enough and labor conditions had firmed sufficiently for them to feel reasonably confident that inflation would return to the central bank’s longer-run objective over the medium term. There were also worries about further pressure on inflation from international developments, along with uncertainty about when wages might start to accelerate and translate into increased price inflation. In addition, several officials expressed concern about the risks to US growth from a material slowdown in China. However, the minutes did not necessarily close the door on a September liftoff. Most participants continued to believe that pressure from depressed energy prices and a strong dollar would prove transitory. The Committee also seemed fairly confident that the labor market was strong enough to warrant a near-term rate hike.
Positioning headlines fit with risk aversion:
  • There were a number of headlines surrounding positioning/sentiment that fit with the meaningful pickup in risk aversion this week. A Bloomberg article noted that according to Credit Suisse, short positions in US equities by macro hedge funds exceed bullish ones by 22 percentage points, the most pessimistic stance since January 2009. In addition, Goldman Sachs said that its latest “Hedge Fund Trend Monitor” showed funds have boosted exposure to defensive sectors while paring cyclical allocation. A separate Bloomberg report noted that bearish sentiment toward single stocks in the US options market is higher now than at any time since 2012. The latest BofA Merrill Lynch Global Fund Manager Survey also showed record underweight positioning in commodities, emerging market and energy stocks. The firm’s weekly “Flow Show” report pointed out that equities saw $8.3B of outflows, the first exodus in seven weeks and the biggest in 15 weeks. At the same time, Treasuries saw their seventh straight week of inflows, the longest streak since November 2012. Sell-side strategist and press commentary also highlighted signs of increased vulnerability in crowded momentum trades.
Housing a rare bright spot this week:
  • The housing sector was one of the few bright spots this week. Homebuilder sentiment hit its highest level in August since November 2005. The NAHB said that jobs and economic gains should keep the market moving forward at a modest pace throughout the rest of the year. Housing starts increased to their highest level in July since October 2007. The details of the report were fairly upbeat as single-family starts drove the upside, hitting their highest level since December 2007. Permits disappointed, but had been running stronger in recent months. Existing home sales increased for a third straight month, hitting their highest level since 2007. However, the NAHB did point out that foot traffic slowed in July due to concerns about higher prices (without commensurate income gains) and low inventory. The earnings calendar was also supportive for housing sentiment. HD (3%) reported that comps increased 4.2%, ahead of the FactSet consensus for 3.6% growth. It also said it continues to see positive signs in the housing market, highlighting stronger-than-expected turnover and household formation. In addition, LOW (1.4%) reported that comps increased 4.3%, better than the FactSet consensus for 3.7% growth.
Mixed takeaways from earnings:
  • As usual, there were some mixed takeaways from the earnings calendar. In retail, TJX +1.4% was a standout with help from the secular tailwind behind the off-price model. However, its results set a high bar for ROST (6.9%), which was also hit by a softer 2H comp outlook. The Street was largely positive on the beat and raise from TGT (1.2%). While WMT (8.1%) beat on comps and the traffic rebound continued, investments remained a drag. Analysts liked the comp outperformance from AEO (12%), though guidance for a comp deceleration hit the stock. The lack of visibility into the turnaround at the Gap brand continued to dog GPS (6%). In tech, ADI (8.6%) had a rare beat and raise in the semi space, but it was the company’s increased AAPL (8.8%) exposure that provided the tailwind. Billings upside and large deal momentum were some of the bright spots for CRM (5.3%), though valuation continued to get cited as an overhang. A combination of low expectations and enterprise strength helped HPQ (4.3%). Divestitures weighed on guidance from INTU (15.4%). Elsewhere, DE (11.7%) was a notable laggard after it cut is F15 guidance and guided for a second year of lower US farm cash receipts in F16.
Energy leads market lower:
  • Energy resumed its underperformance this week with WTI crude down nearly 5%. It was the eighth straight weekly decline for oil, the longest losing streak since 1986. Tech was another laggard. Semis sold off with the SOX (8.3%), dragged down by memory names SNDK (15.4%) and MU (14.3%). Higher-beta software plays also saw outsized pullbacks. The risks of a later liftoff and some cautious press coverage on margin turnaround expectations hit the banks with the BKX (6.7%). Industrial metals were the big drag on the materials sector. Steel names X (17.4%) and AKS (12.4%) were among the worst performers. However, precious metals stocks benefited from safe-haven interest with GDX +6.2%. Weakness in the industrials was fairly broad based. E&Cs, ag equipment and energy leveraged multis were among the big decliners. Retail was a laggard in consumer discretionary with XRT (6%). Media names remained under cord-cutting scrutiny and related sell-side downgrades, while NFLX (15.8%) seemed to get caught up in the momentum selloff. A similar dynamic played out in biotech with IBB (6.7%). Defensive leaning sectors like utilities and telecom held up the best, but still finished down over 1%.
Sector Performance (vs the S&P 500):
  • Outperformers: Utilities (1.20%), Telecom (2.63%), Consumer Spls. (4.82%), Healthcare (4.95%), Consumer Disc. (5.22%), Industrials (5.40%), Materials (5.47%)
  • Underperformers: Energy (8.65%), Tech (7.37%), Financials (5.91%)

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