A Week That Had It All
The week that just concluded had it all. There were earnings results, economic data, a monetary policy report, M&A activity, calls for tax reform, geopolitical conflict, and volatility. It was a remarkable week, and when it was all said and done, it was another winning week for the S&P 500, which gained 0.5%.
The financial sector led the earnings reporting brigade and just about every major financial firm that reported assaulted their S&P Capital IQ consensus earnings per share estimates. To wit: Goldman Sachs (GS) beat by $1.04, BlackRock (BLK) beat by $0.43, Citigroup (C) beat by $0.17, JPMorgan Chase (JPM) beat by $0.16, and Bank of America (BAC) beat by $0.12. The aggregate response was favorable. The financial sector gained 1.0% for the week.
The only other sector that did better was the technology sector. It gained 1.6%, bolstered by impressive results from Intel (INTC) and Google (GOOG), and news of a partnership on made-for-business applications between Apple (AAPL) and IBM (IBM).
The economic reporting wasn’t quite as robust. The retail sales, industrial production, housing starts, building permits, leading indicators, and University of Michigan Consumer Sentiment reports all came in below expectations. There were some upbeat reports though, namely the Empire Manufacturing, NAHB Housing Market Index, Initial Claims, and Philadelphia Fed Index reports. In sum, it was a mixed week of economic reporting that didn’t alter the market’s thinking at all about the timing of the first hike in the fed funds rate.
On a related note, Fed Chair Yellen went before the Senate Banking and House Financial Service Committees on Tuesday and Wednesday, respectively, to deliver her semiannual testimony on the economy and monetary policy. Much of what she said had already been heard before by the market.
Briefly, she noted that the economy is getting better, but that it is still not on firm enough footing to raise rates. She conceded that a rate hike could occur sooner than expected if incoming data proved to be stronger than envisioned, but that, ultimately, any interest rate decision would be dependent on incoming data.
One thing Ms. Yellen did say that caused quite a stir was that “equity valuations of smaller firms as well as social media and biotechnology firms appear to be stretched.” That view got all of the talking heads worked up as it was likened to Alan Greenspan’s “irrational exuberance” speech in 1996. It did lead to some increased selling pressure in those respective spaces. The Russell 2000 ended the week down 0.7% while the iShares Nasdaq Biotechnology Index (IBB) declined 2.5%.
Once again, there was a good bit of M&A news this week. The featured item of the week on that front was a report that Time Warner (TWX) turned down an $80 bln buyout offer from 21st Century Fox (FOXA). The bookend to the week, though, was the news that Shire Pharmaceuticals (SHPG) finally accepted a $54 bln buyout proposal from AbbVie (ABBV). Separately, there was a call by Treasury Secretary Lew for Congress to pass legislation that prevents tax inversions in merger deals.
All of the corporate and economic news took a distant backseat to geopolitical developments on Thursday that included reports of new sanctions levied by the US against Russia, a Malaysian Air passenger jet being shot down by a surface-to-air missile over eastern Ukraine, and Israel launching a ground assault in Gaza. The confluence of those reports led to a 1.2% decline in the S&P 500, which marked the first 1.0% move on a closing basis for the blue-chip average in 62 sessions.
Thursday was a day riddled with uncertainty and the capital markets reflected as much. Gold prices went up, oil prices went up, longer-dated Treasury prices went up, stocks went down, and the CBOE Volatility Index soared 32% (albeit from a depressed base). There were more questions than answers, and with so much uncertainty, there was a broad-based profit-taking move in the stock market.
What fell apart on Thursday, though, was quickly put back together on Friday. Emboldened by a sense that worst-case scenarios would be avoided on all fronts, the stock market stormed back in a short-covering rally that saw all ten S&P 500 economic sectors trade higher. Friday’s trade quickly became the reverse image of Thursday. Gold prices went down, oil prices went down, longer-dated Treasury prices went down, stocks rallied, and the CBOE Volatility Index plummeted 16%.
The gains that were logged on Friday proved to be the difference that enabled the S&P 500 and Nasdaq Composite to finish the week higher. The Dow, which was up 0.2% for the week entering Friday, simply extended its gains and ended atop the leaderboard for the major indices. The Russell 2000, which was down as much as 2.5% for the week on Thursday, closed that gap with a big 1.6% gain on Friday.