The first tick on the SPX today was slightly negative–the low of the day. From there, the SPX made its way to 1375, pausing only briefly in advance of the 10 AM economic releases. Although several indicators came out this morning, including Case-Shiller HPI, Consumer Confidence, and New Home sales, I would venture to say that the most important contributor to today’s move was the Richmond Fed’s April Manufacturing Index. Not far behind in importance was the revision to February New Home Sales (from 313k to 353k). There is a lot going on with today’s New Home Sales release and perhaps market participants we’re initially feeling euphoric with the mixed bag of data. The afternoon session churned lower.
While this week is significant in terms of earnings, including that of Apple (AAPL) after the close today, I think it is time to review one sector in particular–Financials. Financials were one-half of the duo that contributed the most to the first quarter gains in the SPX.
While EPS Growth for financial companies that have already reported Q1 earnings tracks 10%, low volatility and light volume has dampened the revenue from trading activities. Equity volumes were 16% lower than the prior quarter and 31% below year-ago levels (NYSE via Dow Jones). After reporting earnings April 19, Mike Mayo of CLSA downgraded Bank of America to a (rare) Sell rating stating that Q1 earnings for BAC are “likely as good as it gets.” BAC traded over $9.30 per share pre-market that morning only to fade before RTH. BAC traded below $8.00 per share on April 23rd.
While it is always difficult to peg a turning point, one thing is for certain: Financials, and Technology for that matter, will not always outperform over every time frame. If we are experiencing a sector rotation taking place, in which the decline to sub-1360 provided that catalyst, I think the right opportunities will come from Dividends, Consumer Staples, select Consumer Discretionary, and Healthcare–sectors that might traditionally be thought of as value.
I’m not as much concerned with the upside in equities as I am with the return path of performance. As I said in the beginning of the year, after expecting a quick 10% rise in the SPX, it will be imperative to understand the long-term potential for equities–at an annualized rate–is closer to 5% than it is to 10%. My prediction remains that the SPX will reach new yearly highs by mid-May; however, between now and then I will seek to reduce beta and increase performance consistency.