A volatile week of whipsaw market action pushed all the major U.S. equity indices back into the red on a year-to-date basis. The S&P 500 sunk to a two-month low after making new all-time highs only a month ago. Market leadership has been undergoing a profound shift away from U.S. growth to defensive value and non-U.S. assets. Momentum has also been waning among last year’s standout small-cap issues, often an indication of a tired market.
In fact, equity investors have been aggressively selling previous winners for the last couple of weeks, shedding high momentum leaders in areas like biotechnology, social media and homebuilders. They have opted instead for defensive and value names in the staples, utilities, telecom and energy sectors while also rotating into unloved emerging-market stocks and bonds. After several years of underperformance and subsequent capital outflows, emerging markets have become increasingly under-owned by professional investors. However, money has been flowing back to emerging markets as investors search for valuation bargains in this beaten-down asset class.
For the week, the S&P 500 dropped -2.65%, the Dow lost -2.35%, and the MSCI EAFE (developed international) fell -1.79%.
Here are the 3 stories this week that rose above the noise:
The Tide Is Turning for Greece – and the Eurozone
While unrest in the Ukraine has caused volatility in global markets, steady improvement in the Eurozone’s sovereign debt crisis may have gone unnoticed. An article from The Wall Street Journal, points out that Greece returned to the bond markets last week, which was a symbolically important moment for the euro crisis.
For the country at the center of the crisis to draw €20 billion ($27.77 billion) of foreign demand for a five-year bond yielding under 5% shows that the market now believes Greece will stay in the Eurozone. It also indicates the market thinks Greece won’t collapse into chaos and that any further debt relief will be provided by official rather than private lenders. A year ago, there were few takers for that bet. The tide of money flowing into the crisis-country assets comes amid growing evidence that Southern Europe has turned the corner.
Here's the One Trend to Watch in Earnings Season
The first-quarter earnings season has begun and consensus analyst expectation is for 3% revenue growth and a 0.13% decline in earnings for S&P 500 firms. The bar is low for first-quarter revenue and earnings growth, but revenue among S&P 500 firms is expected to increase by 4% this year, ahead of 1.1% revenue growth in 2013.
It’s an encouraging sign that revenue growth is expected to increase and also exceed the growth rate of earnings, which signals that consumer demand is beginning to have a larger impact on corporate profits, following several quarters of corporate austerity. Additionally, revenue growth will be a lot more important in the coming quarters as corporations may not be able to access large levels of cheap debt to fund large-scale buyback programs to boost stock prices if interest rates increase as the Fed winds down its QE program.
Value Is the New Momentum, in Three Charts
Large-cap value stocks, as measured by the Russell 1000 Value Index, rose 2.2% in March, easilyoutperforming the Russell 1000 Growth index, which was down 1.1%. The performance reverses a trend seen in the second half of 2013 and the first two months of 2014.
Morgan Stanley strategist Adam Parker notes that historically “value tends to continue its advantage over growth following strong value rallies.” Additionally, “following a strong value rally, on average, the market underperforms its historical average for the next 10 months.” Parker points out that energy and consumer-staples stocks typically lead in these environments, while technology and telecom stocks lag.
Articles chosen & summarized by the First Allied Asset Management, Inc. investment management team.
Articles chosen & summarized by the First Allied Asset Management, Inc. investment management team.
