Disappointing U.S. GDP data came out late last week. At 2.6 percent growth for the final three months of 2014, the figures from the Bureau of Economic Analysis revealed the impacts of the growing global malaise on domestic activity. For consumers, cheap fuel and a strong U.S. dollar have led to a rebound in household spending that drove consumption measures to reach a multiyear high. Exports were impacted by the strong dollar, however, and growing uncertainty over future monetary policy at home and abroad have contributed to stagnating wages and slowing corporate investment levels. Figuring out whether the economic glass is half empty or half full for U.S.–based companies is critical for investors figuring out how to position their portfolios. With clear indications of a continued rotation into defensive sectors of the equity market and strength across the curve for Treasuries as the new week begins, broad sentiment appears to be in favor of preparing for the worst.
Chinese factory numbers register slowdown. Final January HSBC manufacturing purchasing manager data for China confirmed a contraction at a seasonally adjusted 49.7, a marginal improvement over the December reading. Among the subindexes, weakening employment demand was significant as input prices continue to decline.
Tensions over Greek debts rise. Over the weekend, Greek Finance minister Yanis Varoufakis reiterated his government’s intention to negotiate a debt restructuring plan with international creditors while insisting that no new credit lines will be required. In recent days German leaders have continued publicly to insist that Greece must make good on all outstanding bonds. Separately, reports have surfaced that the European Central Bank may rescind by month’s end special short-term collateral arrangements in place for Greek banks if that nation’s government proceeds with antiausterity actions.
PMI data in Europe disappoints. Final German manufacturing purchasing managers’ index data for January released today registered at 50.9, weaker than the flash reading, with the critical employment subindex retreating further than analysts had forecasted. Aggregate headline index levels for the euro zone remained unchanged at 51.
ExxonMobil reports quarterly earnings.< Oil major ExxonMobil reported this morning fourth-quarter 2014 earnings of $6.57 billion, or $1.56 per diluted share. While representing a 21 percent decline over the final three months of 2013, the results were significantly higher than consensus analyst forecasts despite the extreme pressure on margins from declining oil prices. Excluding certain factors, total ExxonMobil production grew 3.8 percent year-over-year.
U.S. consumer and manufacturing data on deck. In the U.S. December personal consumption expenditure data, due out today, are expected to indicate a slowdown in household spending, as dampened personal income figures offset lower prices driven by low fuel costs. Separately, Institute for Supply Management manufacturing numbers are forecast to remain flat for the month of January. Last month’s headline reading for the factory survey came in at the softest level in six months at 55.5, suggesting that U.S. manufacturers are increasingly feeling the impact of weakness abroad.
Portfolio Perspective: U.S. Equity Market Outlook — Adam Grimes, Waverly Advisors
Stocks were mixed last week, with the U.S. showing a slight decline. Though this move appears to be at odds with our long-term call for U.S. outperformance, this is most likely simply a short-term bump in the road — or, more properly, force of mean reversion at work in those relative performance spreads. We still see every sign of U.S. outperformance on horizons of one quarter or longer, however.
In U.S. stocks, pay attention to the spread between small and large-cap stocks. Small-caps have lagged decisively for a full year, but we are starting to see some shifts in that spread. Contrary to popular opinion, small-cap leadership is not essential for a broad market rally but it would almost certainly be supportive. Watch this spread carefully over the next month.
We hold overweights in aggressive sectors including consumer discretionary, technology, health care and financials, and an underweight in materials. Financials have our attention recently, as weakness there is inconsistent with leadership. Despite broad tech weakness, a few key Tech subindexes, such as computers & Peripherals, continue to hold on to strength. The market is locked in broad consolidation, however, and some degree of noise is to be expected. Slight underperformance is well within our risk tolerance and for now, we continue to hold overweights with no adjustment.
It is also interesting to consider the sources of strength in the market. A few standout industries to consider such as airlines, biotech companies, specialty retail and real estate investment trusts hold clear positions of leadership.
Expect sector rotation. For tactically aware managers, much of the task of management is staying out of the noise and avoiding the insignificant.
Adam Grimes is the managing partner and CIO of Pittsford, New York–based research and asset management firm Waverly Advisors.
