Market Perspective for December 29, 2014

The Russell 2000 Index will try to finish 2014 at a new all-time high following nearly a year of sideways trading. The small cap index peaked in spring 2014 but was unable to find support allowing it to follow the rally in large-caps. A push in the final days of 2014 is possible given mid-caps climbed to a new 52-week high last week. While mid-cap stocks had under-performed in 2014, they have turned higher and started closing the gap with large-caps. If they don’t turn up this week, we will likely see small-caps play catch up in early 2015.

Domestic stocks have the wind at their back following last week’s revision of GDP up to 5.0 percent growth. A rise in healthcare spending driven by the Affordable Care Act led to the surprise number, which was well above even the optimistic 4 percent growth forecasts. Although the boost in healthcare spending is good news for the sector, it may fail to be the best performing sector this year, hurt by last week’s dip in biotechnology. Instead, utilities are on track to be the best performing sector to close the year. The S&P 500 utilities sector is up 27.90 percent this year, ahead of the 24.71 percent return for the healthcare sector.

Aside from strong economic growth reported last week, American stocks and bonds may benefit from turmoil in Europe after Greece’s ruling party failed to elect a new president. A general election will be held at the end of January following the third round of presidential voting, in which New Democracy leader Antonis Samaras failed to secure the 180 votes needed for victory. The latest polls show the anti-austerity Syriza party with a 6 percent lead on New Democracy. This weekend, Germany’s finance minister warned Greece that it will be expected to adhere to international agreements, no matter who wins. In the past, Syriza leader Alexis Tsipras has said he would abandon austerity.

The immediate result of the failed presidential vote was a more than 10 percent drop in Greek equities, though losses were curtailed by the end of the trading day. Greek bond yields jumped while yields on northern European sovereign debt sank as investors moved to safety. The two-year German bond yield fell to negative 10 percent and the 10 year yield dipped to 0.56 percent. It remains to be seen if this is a trend or an overreaction by investors, but the shift in European assets is positive for the U.S. dollar and assets prices this week.

Global markets will be closed on Thursday for New Year’s Day. Some countries also have a holiday on Wednesday or Friday. December purchasing managers’ indexes will be out on Friday. Few companies will report earnings during this holiday shortened week.

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