Mixed trading and vacillation are the stock market’s character traits for much of this year. From one day to the next, it seems to be a market of the haves and have-nots. And in some cases, the action of the few has set the course for the many. As a result, widespread volatility has seemingly been on vacation, limiting the opportunities for more risk-prone traders and investors. The next question: can this continue? The better question: what sector or group is set to take the lead into the last two quarters of 2014?
So far, blue-chip stocks in the Dow Jones Industrial Average (DJIA) are logging the most notable strength. But remember, it’s an easily skewed index in which a few names set the action. For instance, IBM had an almost singularly strong day Friday. The result? Another record-high close for the index.
Now, is that a true picture of the market, or perhaps more importantly, reflective of the economy? A shift to economically sensitive cyclical stocks and small caps might put some weight behind predictions for a more robust economic performance in the second of 2014. It hasn’t happened. Yet.
In fact, recent all-time highs in the DJIA masks weakness in other areas like consumer cyclicals and small- cap stocks. Small-cap barometer, the Russell 2000 (RUT) was down almost 2% last week. But what is really concerning to some is that many key members of the index were down 10% or more for the week. Taking a bigger snapshot, the Russell trades down over 9% from the recent high scored two months ago. And, consumer discretionary names are down more than 5% so far in 2014. Compare these areas to the historically defensive, counter-cyclical utility group. It’s up 12.5% on the year.
Does small-cap weakness risk creeping into the broader market? Many industry market-watchers look for small caps to lead. Or are we simply talking about yet another rotation, from the small caps to the biggest of the big caps, perhaps?
Figure 1: One-year view of the small cap-focused Russell 2000 through May 9, 2014. Data source: Russell Investments. For illustrative purposes only. Past performance does not guarantee future results.
The pace of earnings reports slows this week, but some notable companies are due to release results Wednesday: Deere (DE), Macy’s (M), and technology bellwether Cisco (CSCO). Whether or not you own or are interested in CSCO shares, this is a great conference call for a read on CEO John Chambers’ view of the global economy. Results from Wal-Mart Stores (WMT), Kohl’s (KSS), and JC Penney (JCP) could cast the spotlight on the bigger retailer space when they report on Thursday – all might give us a sense of consumer health.
On the economic front, the news flow picks up (figure 2). Retail sales numbers (again, will spotty job market strength push through to actual increases in spending?), inflation, manufacturing, and industrial production numbers are due over the next few days. Thursday’s National Association of Homebuilders sentiment and Friday’s housing starts numbers may impact trading after Federal Reserve Chair Janet Yellen told Congress last week that recovery in the housing sector (itself a little spotty) is important to the improvement of the overall economy.
Gyrations in the currency markets might also affect this week’s stock trading after an uptick in volatility in the euro late last week. The EUR/USD pair made a run to 52-week highs near 1.40 Thursday, but the rally was thwarted by commentary from European Central Bank President Mario Draghi who said additional monetary stimulus might be needed in June. The recently strengthening Japanese yen faces a test when Japan’s GDP numbers are released Wednesday.
Indeed, uncertainty about the longer-term economic outlook is possibly the key reason the rally in the S&P 500 seems to have stalled around the early-April highs. While there is plenty of talk about the potential for an economic recovery in the back half of 2014, low Treasury bond yields, the lackluster performance in the dollar, and weakness in some commodities, including copper and lumber, are inconsistent with the most-optimistic scenario for growth in 2014. Will stocks start to confirm that concern?
Figure 2: Weekly U.S. economic report calendar. Source: Briefing.com.
TD Ameritrade, Inc., member FINRA/SIPC/NFA. Commentary provided for educational purposes only. Past performance is no guarantee of future results or investment success.
Supporting documentation for any claims, comparison, statistics, or other technical data will be supplied upon request.