Financial Professionals

Market Insights

A A A

Welcome February

02/03/2014

The S&P 500® Index (SPX) staggered through the month of January, declining 3.56% to a January 31 close of 1782.59. Over the weekend, the January China PMI (Figure 1) was released at 50.5, matching consensus estimates but the weakest reading since July’s 50.3.

The week ahead brings 92 more SPX companies to report, critical U.S. economic data in the form of the ISM manufacturing and January nonfarm payroll report. Collectively, the near-term challenge, whether for SPX earnings, U.S. data, or global data, is the continued headwind from the emerging markets. I continue to view that headwind as driven by asset allocations away from emerging markets rather than by fundamentals that suggest some form of emerging market crisis similar to 1998.

Many have suggested that the emerging markets-driven poor performance of the SPX is a harbinger of a lousy 2014 for risk assets. That reality remains unknown. Keep in mind, after a 2009 SPX return of 23.45%, January 2010 (Figure 2) followed with a 3.7% decline. The year-to-date performance for the SPX in 2010 was 12.78%.

Figure 1: China PMI Manufacturing
 
Source: Bloomberg

Figure 2: S&P 500 Index (SPX) 2010

Source: Bloomberg

The Week Ahead

  • Monday’s U.S. ISM manufacturing consensus estimate is for 56.0, lower than the previous month’s 56.5. The average of the prior six months is 56.2 and the prior three months is 56.7
  • The upcoming week presents 92 more SPX companies reporting earnings. As of January 31, 251 SPX companies have reported. EPS growth is up 9.48% and sales growth is up 2.25%. Profit margins continue to expand, currently at 9.43%, up from the prior quarter’s 8.82%. (Figures 3 and 4)
  • Friday presents the January nonfarm payroll report. Consensus estimates are for a sharp rebound from December’s weather-distorted disappointment.
    • January headline estimate: +180,000, up from December’s +74,000; private payroll estimate +190,000, up from December’s +87,000; and the unemployment rate unchanged at 6.7%

Figure 3: SPX Updated Profit Margin

Source: Bloomberg

Figure 4: SPX EPS and Revenue Growth, as of January 31, 2014


Sector

Reported

Yet to Report

Sales Growth

EPS Growth

Overall SPX

251

248

2.25 %

9.48 %

Consumer Discretionary

31

53

8.95 %

14.41 %

Materials

20

11

3.53 %

47.55 %

Utilities

7

24

5.03 %

10.39 %

Technology

45

20

5.63 %

8.09 %

Telecom

3

3

2.73 %

30.97 %

Industrials

40

23

1.95 %

17.51 %

Consumer Staples

13

27

4.81 %

4.98 %

Health Care

29

25

4.52 %

0.14 %

Financials

44

37

1.37 %

19.13 %

Energy

19

25

-4.66%

-8.34%


Source: Bloomberg

SPX Technical Update

In the Q1 2014 playbook I identified a near-term point of reference of 1767.99 from December 18’s FOMC taper announcement day. This past week, the SPX (Figure 5) challenged that level on multiple occasions and found support in each instance with a low for this week of 1770.45. Gauge closely any further challenge to that level this week. A sustained decline, and close, below 1767.99 eliminates the “taper advance” from December 18 and next positions the SPX (Figure 6) to challenge the November 2013 monthly low of 1746.20.

 
Figure 5: SPX, December 2013 to January 2014
 
Source: Bloomberg

Figure 6: SPX, January 1, 2013 to January 31, 2014

Source: Bloomberg

Emerging Markets

The consensus view of 2014’s asset allocation looks incorrect year to date. Treasury yields have fallen as fixed income has gotten off to its best start since 2008. Japanese equities are down 8.4%, the yen has risen 3.2%, and gold is up 3.14%. The yen’s rise has disrupted the tailwind provided in 2013 from the global “carry trade.”

Before we declare these surprises an evolving trend, I expect we must first view them as “trades” largely predicated on the emerging market stress. With central banks in India, Turkey, and South Africa raising interest rates as a response to the stress, I suspect investors are tempted to bottom pick for the collective emerging market asset class. Consistent with my 2013 view, I still expect that is not the correct strategy. Rather, I would first seek opportunity in emerging market economies highly correlated to the United States such as India, South Korea, and Mexico. Next, favor select emerging market equities followed by emerging market debt. I still expect emerging market currencies (Figure 7) to provide the least opportunity for investors and be the last to find their trough.

Figure 7: 2014 Global Currency Returns
 

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.