US STRATEGY – WAKING UP TO REALITY

We are waking up today to the U.S. Dollar Index trading at a 3-month high on the strength of the U.S. recovery.  On the MACRO calendar today we have initial jobless claims and the Index of leading indicators; both data points will signal continued economic improvement.     

 

Despite all the signs of an economic recovery and inflation returning in the US, yesterday’s statement from the FOMC meeting proved to be a carbon copy of the last.  While the Fed clearly referenced signs of a pickup in economic activity, it failed to acknowledge that the cost of living in the US is accelerating.  The FED is way behind the curve.  

 

Yesterday the DOW finished down 0.1% and the S&P 500 finished higher by 0.1%.  Although a late-afternoon pullback left the indexes closer to the lows by the end of the day.  The year is winding down and the Research Edge quantative models have the sector study breaking down. 

 

Yesterday the MACRO calendar was supportive of the global RECOVERY trade.  The MACRO data included better-than-expected economic data out of the US and Europe – US housing starts, UK unemployment, German and French flash PMIs.  This led to the outperformance of the sectors most leveraged to the RECOVERY theme, such as Materials (XLB) and Energy (XLE). 

 

The move into riskier assets was evidenced by the Russell 2000 rising by 0.8% and the VIX declining 4.4%.  Over the past week the VIX is down by 9.4%.

 

The second best performing sector was Energy (XLE).  The XLE benefited as Oil rose the most in a month yesterday after the Energy Department said U.S. crude inventories declined to the lowest since the week ended Jan 9th.

 

In November housing starts increased 8.9% month-to-month to a 574,000 annual rate.   The overall number benefited from multi-family starts surging 67.3; the biggest gain since 1992. Single-family starts rose 2.1% to 482K following a 7.1% decline in October.   Permits (a key leading indicator) were also looking positive - multi-family permits rose 8.8% and single-family permits were up 5.3%.   On the back of this news housing-related stocks were among the best performers in the Consumer Discretionary (XLY) and the XHB was up 1.4%.

 

The Financials (XLF) slightly outperformed the S&P 500 despite the headwinds facing the banks.  Within the XLF the Life insurance names were a bright spot with LNC and PRU leading the way.

 

The worst performing sector yesterday was Healthcare (XLV).  The XLV underperformed by 0.4%, despite the continued upbeat sentiment surrounding managed care stocks on watered-down reform expectations.  The PBMs were among the biggest headwinds for the XLV yesterday. 

 

The range for the S&P 500 is 1.0% upside and 1.0% downside.  At the time of writing the major market futures are trading lower.

 

In early trading today, crude snapped two days of positive performance as the dollar index is up 1%. 

 

In London Gold is trading lower as the dollar is higher.  Gold is now 8.1% below the record $1,226.56 reached on Dec 3rd.

 

Copper fell the most in a week, declining 1% to 3.17.

 

Howard Penney

Managing Director

 


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