Week End Market Perspective

The markets looked to rebound today after Thursday’s losses.  While giving up some of the early morning gains, the S&P 500 and Dow Jones Industrial Average managed to increase 0.46 and 0.36 percent, respectively.  For the week, the S&P 500 fell 0.5 percent, while the DJIA rose 0.1 percent.  The technology heavy NASDAQ fared far worse, down 2.8 percent.  As it turned out, it was the worst weekly stretch for index in 15 months.

Without a doubt, it has proved to be a challenging week for the markets. First, economic data came in weaker than expected.  New home sales fell 3.3 percent in February, coming in at an adjusted annual rate of 440,000, lower than analyst forecasts.  Additionally, January’s report was also revised lower, down to 455,000. Existing home sales, which account for the vast majority of purchases, also fell for the second consecutive month.  With the Federal Reserve indicating rate increases coming in the near future, a broader pickup in the economy will be needed to offset higher mortgage rates.

On Monday, the Markit preliminary U.S. Manufacturing Purchasing Managers Index (PMI) fell to 55.5 after posting a 57.1 report last month.  While it was below analysts’ expectations of the 56.6, it is still well ahead of the 53.7 we saw in January.  Moreover, the services sector picked up with a reporting of 55.5, up from 53.3 in February.  The composite index of both manufacturing and service sectors came in at 55.8, and improvement of over the 54.1 reporting.  Placed in context, any report over 50 shows a growing economy even if it is a slow rate.

Markit’s Chief Economist, Chris Williamson summarized the indicators by stating in his commentary:

“Service sector activity rebounded in March after a weather-torn February, but the survey is clearly flashing some warning lights as to whether the economy has lost some underlying momentum and that growth could slow in the second quarter.”

 “Even with the rebound, the two PMI surveys are merely consistent with annualized GDP growth of approximately 2.5% in the first quarter, largely unchanged on the disappointing 2.4% rate seen in the fourth quarter of last year.”

After Williamson’s comments, it was announced that fourth quarter GDP growth was revised up from 2.4 to 2.6 percent.  The driver behind the revision was the largest uptick in consumer spending in three years.  This certainly provides a positive sign, but due to the harsh winter, we do not expect to see an improvement on those numbers in Q1 2014.

Taking that into consideration, the National Association for Business Executives (NABE) stated that while we will have slow growth over the short-term, it should accelerate as the year goes on.  For 2014, they expect real GDP growth to be 2.8 percent, followed by 3.1 percent growth in 2015.  The also view the probability of another recession to be 15 percent.

Over the short-term, we expect to see an increase in volatility, especially if the Q1 earnings season has companies providing results that miss expectations.  As we track in our Global Momentum Guide, the short-term leaders have retreated. Biotechnology stocks were sold off continuously over the week, and are down significantly again today.  While this is disconcerting for investors, remember there was a large sell-off from January, before the sector again rallied.

We have recommended biotechnology in our models for some time and have enjoyed a healthy return over that period.  As biotechnology has historically been very volatile, investors must be comfortable with weeks where the funds may increase or decrease by 10 percent in only a few trading days.  For investors who have seen returns of 50 percent or more in this sector, you want to be careful these positions are not outsized relative to the rest of your portfolio.  If they are, you may want to take profits and move those gains to more conservative options.

Technology has also lost ground.  Google (GOOG) suffered its worst week in more than two years. Social media stocks struggled as well, with Facebook (FB) sliding more than 10 percent. Some Internet funds have fallen for three straight weeks; two of the Internet ETFs we track in the Global Momentum Guide have lost value on 12 of the past 15 trading days.

Important Note: You can view the latest momentum rankings, plus buy and sell recommendations each Monday on our website.

Despite the lackluster reports, as a whole the broader indexes held up very well.  Keep in mind one good week can push the S&P 500 Index to another new all-time high. Ultimately, losses were concentrated in the more volatile sectors of the market.  This is a good sign. Furthermore, some technology sub-sectors are nearing technical support levels and many have become oversold, indicating a bounce next week is likely.

Two Important Updates from the Mutual Fund Investor Guide:

Finally, we would like to update you on some additional tools that can help you manage your investments:

  1. We have begun publishing the model portfolios, rankings and data for our new Global Momentum Guide.  For the next 2 weeks, we will be making our proprietary momentum based trading strategy available absolutely free of charge.  The latest recommendations are uploaded each Monday.
  2. The first issue of the Investor Guide to Vanguard Funds will be published on April 15th.  If you have not yet had the opportunity to subscribe, please visit:  https://www.mutualfundinvestorguide.com/subscribe/vanguard-funds-signup/?s2-ssl=yes

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