Believe or not, it is already time to begin thinking about the month of March. This past weekend’s Northeastern weather warm-up certainly hinted toward the possibility of spring just a few weeks away. Toss in some later sunsets and spring-training Yankees baseball and yes, the reality of Q1’s end is here.
However, within the capital markets it feels as if the year has not even begun. The S&P 500® Index (SPX) closed on Friday at 1836.25, just -0.655% below the December 31 close of 1848.36. The 10-year U.S. Treasury (Figure 1) last traded 2.7310% on Friday, down from the December 31 two-and-a-half-year high close of 3.0282%.
Looking ahead into March the relevance of U.S. economic data will increase. March’s employment and manufacturing reports hold far greater significance than January or February, especially as the next FOMC meeting approaches on March 19.
Forecasting the future price of the SPX is not mine, or really anybody’s specialty. If it were, investors could just purchase the actual SPX index and close their eyes. More prudent is to identify risk assets where the tailwinds are strongest and have the highest probability to continue persisting. That is what my commentaries, whether via market insights (blogs) or quarterly playbooks, attempt to accomplish.
Reflecting back and looking forward, what stands out to me is “status quo.” During the first two months of 2014 the elevation of volatility in the emerging markets initiated a modest SPX correction to 1737.92. Within my commentaries, I have outlined my expectation that the emerging markets would have a difficult time reassuming a “first in class” investment status as the U.S. economic and corporate data looks more and more appealing.
Here are some quick bullet points to consider as we head into March, most of which can be categorized as “status quo”:
- Despite a sense of extreme emerging market pessimism, the MXEF Emerging Market Index is down only 4.33% in 2014. India, China and Taiwan appear resilient relative to their emerging market peers.
- Very quietly and certainly falling under the status quo as it relates to our Q1 playbook, Europe remains investable with core economies standing out. The German DAX and British FTSE are both positive for 2014, up 1%.
- S&P 500 capital expenditure (capex) growth was an expected tailwind in the Q1 playbook. I expect status quo on this going forward. For the SPX to appreciate further, 2014 needs be highlighted by acceleration in capex back toward 10%. I am encouraged with the recent guidance for 2014 capex, in particular from the energy sector. As examples, both Chevron and Occidental are increasing their 2014 capex budgets.
- Despite the polar vortex weather slowdown, tailwinds do persist for 2014’s growth expectations. The positive year-to-date performance for the Nasdaq and Russell 2000 are evidence to that.
- Three big deals have been announced in the past ten days beginning with the $68 billion Time Warner/Comcast blockbuster. This past week, Forest Labs & Actavis followed with a $20 billion deal and most importantly the first big tech deal for 2014 was announced with Facebook’s $18 billion purchase of WhatsApp. “Overweight Technology,” an investment theme from the Q1 playbook remains status quo.
- On to my favorite metrics and strongest tailwinds for the market, SPX profit margins (Figure 2) continue to expand now at 9.55%, quite an acceleration from the previous quarter’s 8.70%.
- While many cite 2014 underperformance for financial equities I would argue that might be temporary as investors rightly have focused on favorable opportunities in debt markets for financials. For now continue focusing on any further opportunities in ownership of financial debt.
- Sentiment was clearly too bearish for commodities heading into 2014; that has translated into impressive year-to-date returns for precious metals, energy (Figure 3), coffee, and agriculture. I use the early commodity strength as evidence to dismiss some of the ominous, recession like scenarios being presented from the perma-bears.
- Technicians take note, the 200-day moving average for the SPX (Figure 4) has now risen to 1721.73, slightly below the 2014 intraday low at 1737.92
- With 443 SPX companies reporting, sales growth is +0.76% and EPS growth is +8.87%.
- The expected demise for REITs has not materialized in 2014. In fact, solid fundamentals and easing in yields has lifted the Dow Jones REIT Index (Figure 5) nearly 7%.
Figure 1: U.S. 10-Year Treasury Prior 52 Weeks
Figure 2: SPX Profit Margins Prior 5 Quarters
Figure 3: Spot Crude Oil October 2012 to Present
Figure 4: SPX Prior 52 Weeks
Figure 5: Dow Jones REIT Index Prior 52 Weeks