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Big Macro Week Ahead

04/25/2014

Just back from Chicago, where I enjoyed a spirited conversation with a great group of Merrill Lynch advisors and a fun night at the United Center watching the Blackhawks come from behind for an overtime win.

As discussed at our meeting, the combination of increased M&A (Figure 1) and a 2014 return to double-digit growth for capital expenditures remains a strong and necessary tailwind for the capital markets. North American M&A just reached $575.8 billion, +57.8% year on year, while overall global M&A stands at $1.2 trillion. The 2014 pace of North American and global M&A is tracking nearly three months ahead of last year’s pace.

Figure 1: M&A Year to Date

Source: Bloomberg

The S&P 500® Index (SPX) (Figure 2) has rebounded from its April 11 intraday low of 1814.36, however, April is still tracking below its historical return average. Over the past 80-plus years, the month of April joins January, July, and December in returning over 1% on average. Currently the SPX is tracking only modestly higher, around +0.25%. I still maintain that if there is a negative quarter to be traced out, the current quarter presents a high probability to be the unfortunate one.

Figure 2: S&P 500 Index (SPX) Year to Date

Source: Bloomberg

Next week brings a tremendous amount of macro events that will largely shape the direction of the SPX over the coming weeks. In addition, another 137 SPX companies will report earnings, bringing the overall reporting season to 75% completion.

First, let’s take a look at the macro events for next week which includes plenty of central bank activity:

  • Next Wednesday, April 30, expect the FOMC to continue its asset purchase reduction pace, shaving another $10 billion worth of purchases, ($5 billion in Treasuries and $5 billion in mortgage-backed securities). Also that day, former FOMC Chairman Ben Bernanke speaks at Brookings. Recently, Mr. Bernanke has become very optimistic on the pace of U.S. economic growth, much more optimistic than while acting as FOMC chair. Current Chair Janet Yellen speaks Thursday, May 1, to community bankers in Washington D.C.
  • Also next week, some key U.S. economic data arrives. On Thursday, the ISM Manufacturing is released. Consensus estimates are looking for a positive report at 54.2, up from last month’s 53.7. On Friday, the monthly nonfarm payroll report will be released. Again, consensus estimates are looking for a positive report, with April nonfarm payrolls rising 200,000 to 230,000, up from March’s +192,000.
  • Investors should also pay attention overseas next Wednesday, April 30, and Thursday, May 1, as China, Japan, and Europe have some important calendar events. I would argue one of the biggest would be Wednesday’s Bank of Japan response to the April 1 consumption tax rise. I am concerned that speculative positions are highly levered to a “blue sky” response from the BOJ.
    • Last month’s China PMI recorded a 50.3, and consensus estimates for next Wednesday night’s 9 p.m. release call for a rise to 50.5.
    • Europe, where investors should maintain a “buy the dip mentality,” holds an important ECB meeting next Thursday morning. Low inflation and a rising euro (Figure 3) might warrant a response from ECB President Mario Draghi next Thursday that includes further “easing” measures.

 
Figure 3: Spot Euro, July 2012 to Present

Source: Bloomberg

Finally, let’s turn back to the current U.S Q1 2014 SPX earnings season (Figure 5) in which 239 companies have reported. Overall SPX sales growth is +3.88% and EPS growth is +6.16%. Profit margins (Figure 4) are down slightly, to 9.53% from last quarter’s 9.55%.

Figure 4: SPX Profit Margin, March 2012 to Present

Source: Bloomberg

Figure 5: SPX Earnings Q1 2014

Source: Bloomberg

Past performance is not a guarantee of future results.

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