Financial Professionals

Market Insights

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Reflecting Back, Looking Forward

01/12/2014

Seven days of trading activity year to date is a rather small sample of information to digest for making portfolio decisions; however, there are some conditions that have presented that bear reflection.

Year to Date Performance through January 10, 2014


S&P 500

-0.32%

Germany

-1.69%

XLV

+2.35%

XLB

-1.26%

Dow

-0.84%

Brazil

-3.74%

XLF

+0.78%

XLP

-1.35%

NASDAQ

-0.05%

China

-6.03%

XLU

+0.66%

XLE

-1.82%

Russell 2000

+0.08%

Russia

-3.21%

XLI

-0.63%

Gold

+3.71%

Emerging Markets

-3.25%

India

-1.39%

XLY

-0.73%

WTI Oil

-5.80%

Japan

-1.31%

Mexico

+0.36%

XLK

-1.18%

US$

+0.78%

Source: Bloomberg

Reflecting Back

1. Performance

Emerging market assets have begun 2014 as the weak global link. In fact, I would label emerging market assets as the number one headwind for further risk asset appreciation.

Activity late last week suggested potential stabilization from the early weakness as select currency strength appeared for the Brazilian real, Indonesian rupiah, Mexican peso, and Chinese renminbi. I suggest investors raise the level of attention paid to emerging market equity and currency performance.

Domestically, the media seems focused on the early struggles of the market, which is unique to the early days of January in each of the past five years. It seems a misplaced area of concern. Small caps (Figure 1) are leading and the VIX (Figure 2) closed Friday at 12.14, below its 13.72 close on December 31.

For those seeking a near-term point of reference for the S&P 500® Index (Figure 3), I suggest utilizing a close below the intraday of 1823.73 on January 6. The major moving averages are still well below the current price, with the 50-day at 1800, the 100-day at 1745.93, and the 200-day at 1689.07.

2. Economic Data

Overall, the early global economic data remains favorable. The 2014 “search for growth” has begun and I expect U.S. GDP to recover from its 2013 malaise of +1.7% toward 3%. Nothing released early in 2014 suggests otherwise for me. Short-term market players have focused on the moderation in China PMI manufacturing from November’s 51.4 print to December’s 51.0 print.

Additionally, last Friday’s U.S. nonfarm payroll report raised concern that the positive economic momentum has stalled. I expect investors await next month’s report before contemplating that possibility. The December nonfarm payroll report was distorted by weather. The evidence to that was the sharp rise in the household survey to 273,000 by those reporting to be not at work due to weather conditions, nearly doubling the average for a December month and the highest level since 1977.

As far as the January 28-29 FOMC meeting, the process to reduce asset purchases began in December. Investors should not expect a “pause” in that process based on Friday’s weather distorted labor report.

  • December nonfarm payrolls rose 74,000, below November’s revised higher +241,000 from a previously reported +203,000
  • December private payrolls rose 87,000, below November’s revised higher +226,000 from a previously reported +196,000
  • The December unemployment rate fell to 6.7% from November’s 7.0%
  • The December labor force participation rate fell to 62.8% from November’s 63.0%. That ties October 2013 for the lowest reading since 1978.

Looking Forward

The upcoming week is all about earnings, more specifically, the earnings for larger financial institutions. In the Q1 2014 playbook “The Search for Growth,” I highlighted the acceleration in S&P 500® Index profit margins over the prior five quarters to a current 8.96%. Investors should pay close attention during the upcoming earnings season to that particular metric.

Of the 29 S&P 500 companies reporting earnings this week, 20 are financial institutions. It begins Tuesday with JP Morgan and Wells Fargo. On Thursday, 12 financial companies report, including Blackrock, Goldman Sachs, Citigroup, and American Express. On Friday, global industrial heavyweight General Electric reports in the morning, along with global energy services company Schlumberger. Energy is the worst performing S&P sector year to date, I suspect largely due to the underperformance of the emerging markets year to date.

Global Risk Asset Correction Watch List

  • SPX technical breakdown (NOT PRESENT)
  • Volatility elevation (NOT PRESENT)
  • Emerging market asset weakness (PRESENT)
  • U.S. earnings and profit margin contraction (TBD)
  • Japan, China or European turmoil (NOT PRESENT)

Figure 1: Russell 2000 Index (RTY)

Source: Bloomberg

Figure 2 CBOE Volatility Index (VIX)

Source: Bloomberg

Figure 3 S&P 500 Index (SPX)

Source: Bloomberg

Virtus Investment Partners provides this communication as a matter of general information. The opinions stated herein are those of the author and not necessarily the opinions of Virtus, its affiliates or its subadvisers. Portfolio managers at Virtus make investment decisions in accordance with specific client guidelines and restrictions. As a result, client accounts may differ in strategy and composition from the information presented herein. Any facts and statistics quoted are from sources believed to be reliable, but they may be incomplete or condensed and we do not guarantee their accuracy. This communication is not an offer or solicitation to purchase or sell any security, and it is not a research report. Individuals should consult with a qualified financial professional before making any investment decisions.