Financial Professionals


Markets & Earnings to Date


Over the first 13 trading days of 2012, the S&P 500® Index has advanced 4.59% (Figure 1.1). That is the best start for a new year since 1997 (Figure 1.2).  The Nasdaq-100® has led the charge with a return of 6.96% (Figure 1.3), as well as small caps represented by a Russell 2000® Index (Figure 1.4) gain of 5.89%.
Within sectors, last year’s laggards are leading the advance this year. The Financial ETF (XLF) has gained 8.76%, Materials (XLB) is up 9.19%, and Industrials has risen 7.14%. Of the nine major SPDR sector ETFs, only two are negative for 2012:  Utilities (XLU) has lost 0.86%, and Consumer Staples (XLP) is down 0.28%.
Much of the favorable price action has come from a better outlook for Europe. Sovereign debt auctions have gone flawlessly, and the ECB is stepping up as the buyer of last resort. In fact, the ECB balance sheet is now 2.7 billion euros – significantly higher than six months ago when it stood at 1.95 billion euros. Financial Institutions in Europe are aggressively utilizing the Long Term Refinancing Operation (LTRO). At the end of February, a much larger chunk of liquidity will be offered, which could provide significant insight as to whether Europe has truly seen the worst and is on solid footing for 2012.
Within my most recent market commentary, “Guilty Until Proven Innocent,” I offer a defensive strategy that allows Investors to participate in capital market appreciation through assets I view as less in need of having to prove their Innocence. I await indication that a massive reallocation out of Treasuries will unfold. That will motivate me to suggest assuming more risk. To date, the 10-Year U.S. Treasury yield (Figure 1.5) has modestly up-ticked, but not enough for me to abandon an overweight exposure to defensive assets.
Last year’s Q1 equity market strength was driven by strong reallocations from fixed income into equity funds. Roughly $9 billion was reallocated into U.S. equity mutual funds in January 2011. We will need that type of equity inflows to sustain the 2012 advance.
U.S. corporate earnings have begun to be reported. Currently, 51 of the 500 S&P 500 Index companies have reported as of January 21, 2012. The majority of companies reporting have been in the financial sector (25) followed by technology (9).
I view financial earnings as mixed. It seems expenses are the key theme this season.  Investors will reward those financial Institutions with flawless expense management. Financial EPS included positive surprises from 13 out of 25 companies. The best investment for me remains in the debt of financial institutions, not in equities.
Technology heavyweight Apple (AAPL) will report on Tuesday, January 24, after the bell. I will be watching closely to gauge whether AAPL can sustain its recent strong price action. Fundamentally, within Tuesday’s earnings, the focus will be on how strong IPhone sales were. IPhone quarterly sales of at least $31.5 million are expected. Additionally, can the softness in last quarter’s IPad sales be reversed? At least $13.5 million is priced in for Tuesday’s release. IPad sales need to exhibit the ability to reach $50 million in calendar year 2012.
All investors should be happy with the excellent start to 2012. A strong foundation is being built, but we must be presented with more evidence in the next few weeks that riskier assets are indeed Innocent; for now they are still guilty.  
Guilty Until Proven Innocent” is still the strategy, with corporate bonds, energy, technology, U.S. consumer discretionary, and emerging market consumer staple names still assets of opportunity. 
Figure 1.1            S&P 500 Index - January 24, 2011 to January 21, 2012

Source: Bloomberg
Figure 1.2            S&P 500 Index - January 2, 1997 to January 22, 1997

Source: Bloomberg
Figure 1.3            NASDAQ-100 Index - January 24, 2011 to January 21, 2012

Source: Bloomberg
Figure 1.4            Russell 2000 Index - January 24, 2011 to January 21, 2012

Source: Bloomberg
Figure 1.5            U.S. 10-Year Treasury Yield - January 24, 2011 to January 21, 2012

Source: Bloomberg

Past performance is not a guarantee of future results.

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.