Can’t Judge a Book by its Cover
By John Stoltzfus,
Chief Investment Strategist
Summertime- the living isn’t so easy
Sector rotation, M&A, the 10-year Treasury yield near its low for the year accentuate a process of transition
With two weeks left before the end of the first half of the year and with the summer holiday season beginning to get under way, news flow, economic data, sector volatility and second quarter earnings just a few weeks away suggest seasonality will likely not let up anytime soon for investors wanting to get a little r and r.
A recent spate of sluggishness evidenced in economic growth within data points from autos to housing, wages, and jobs to last week’s release of the CPI and advanced retail sales—along with the Federal Reserve’s reiterated commitment to interest rate normalization via its second 25 bp rate hike this year will likely keep investors close to the radar screen this summer as they look for clues as to what’s the next likely catalyst to gain the market’s attention.
Further profit taking last week in technology, sector rotation and rebalancing along with Amazon’s announcement of its plans to buy Whole Foods Markets (WFM) for $13.7BN provided no lack of excitement last week.
Amazon’s (AMZN) bid for the purveyor of finer groceries was its largest acquisition since it started out as a book seller during the tech boom of the 1990s.
The announcement last Friday turned investors’ and commentators’ attention away from information technology and toward the consumer staples and consumer discretionary sectors.
Within consumer staples grocers and retail pharmacies felt the effect of additional worry as the possible implications and scale of the announced merger were pondered.
“From our perspective on the radar screen, equity markets… are likely to continue to find support from a sustainable economic expansion in the US and international economic recovery…”
The table below of names within the consumer staples and discretionary sectors which were considered among those likely to feel the effects of the wake created by Amazon’s announced acquisition plans includes several household names, some of which were already under considerable pressure from the transition from bricks to mortar and to bricks and mortar.
In the commodities complex the cost of oil fell further last week as WTI (West Texas Intermediate oil) fell 2.4% on the week to $44.74 per barrel and just a few cents above its low for the year of $44.46 per barrel reached last Thursday.
A pick up in the Baker Hughes Rig Count since the start of the year (and over the past 12 months) in combination with a pick-up in stateside oil production continues to dog the price of oil as well as efforts and considerable restraint of production by OPEC and its energy allies.
The S&P 500 energy sector last week reflected the drop in oil price slipping 0.7% on the week. The sector is off 11.8% on a year to date basis. That said, the Energy sector has gained a little over 2% since the start of June as it benefited from the sector rotation out of technology into sectors that have underperformed or lagged so far this year.
Among the other sectors which have also benefited from rotation are Financials, Industrials, Real Estate and Utilities. (See the chart below).
In the week ahead economic data (including existing home sales), any further sector rotation along with several scheduled “Fedspeak” events should keep market participants engaged.
On the international front the implications of the outcome of the French election on Sunday, the process of Brexit in light of recent election results in the UK as well as MSCI’s decision on Tuesday as to whether or not the index provider will add Chinese stocks (the local A - shares) to the MSCI Emerging Market index will likely capture investors’ attention.
Barron’s noted this week that the 169 company candidates being considered for inclusion by MSCI in its widely followed benchmarks are heavily traded blue chip Chinese stocks as opposed to a broader group of 448 stocks considered by MSCI last year.
From our perspective on the radar screen equity markets notwithstanding uncertainties tied to cyclical and secular transitions under way are likely to continue to find support from a sustainable economic expansion in the US (albeit at a modest pace) and an international economic recovery that has become increasingly evident.
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