With 2013 in the rear view mirror, investors are looking for signs that the U.S. economy has enough steam to keep up the impressive growth pace for equities set last year. This means maintaining sustainable growth in 2014 with less assistance from the Federal Reserve in the form of its asset purchasing program, quantitative easing. Based on economic data and corporate earnings released so far in January, investors have had a difficult time reaching a conclusion on where we stand.
To date, 101 of the S&P 500 Index companies have reported fourth quarter 2013 earnings (as of this writing). 71% have exceeded consensus earnings per share (EPS) estimates, yielding an aggregate growth rate 5.83% above analyst estimates (Bloomberg). The four-year average is 73% according to FactSet, indicating that Wall Street’s expectations are still low compared to actual corporate performance. Information technology and healthcare have been big reasons why, with 85% and 89% of companies beating fourth quarter EPS estimates respectively.
Despite these positive numbers, two industries that are failing to meet analyst estimates are consumer discretionary and materials. Both of these sectors tend to outperform the broad market during the recovery stage of a business cycle, which we currently find ourselves in. If they begin to underperform or are in line with the market, then it could indicate the beginning of a potential short-term market top.
There has been mixed data on the macro front as well:
- Annualized U.S. December housing starts were stronger than expected (999,000 vs. Bloomberg analyst consensus 985,000).
- U.S. Industrial production rose 0.3% in December, marking five consecutive monthly increases.
- U.S. December jobless claims fell 3.9% to 335,000; the lowest total in five weeks.
- The HSBC Purchasing Managers’ Index (PMI) was above 50 for most of the developed and emerging markets. An index reading above 50 indicates expansion from a production standpoint. This data supports a broad-based global economic recovery.
- The Thomson Reuters/University of Michigan index of U.S. consumer confidence unexpectedly fell to 80.4 from 82.5 in December.
- The average hourly wages of private sector U.S. works (adjusted for inflation) fell -0.03% compared to a 0.3% increase in CPI for December, 2013. Wages have risen just 0.02% over the last 12 months indicating that American workers have not been benefiting from low inflation.
- Preliminary Chinese PMI fell to 49.6 in January, compared to 50.5 in December and the lowest since July 2013.
The mixed corporate and economic data released in January has led to a sideways trend for the S&P 500 so far in 2014. We remain optimistic for the year ahead, but are managing our portfolios with an eye on the inherent risks previously mentioned.
 The statistics in this release cover output, capacity, and capacity utilization in the U.S. industrial sector, which is defined by the Federal Reserve to comprise manufacturing, mining, and electric and gas utilities. Mining is defined as all industries in sector 21 of the North American Industry Classification System (NAICS); electric and gas utilities are those in NAICS sectors 2211 and 2212. Manufacturing comprises NAICS manufacturing industries (sector 31-33) plus the logging industry and the newspaper, periodical, book, and directory publishing industries. Logging and publishing are classified elsewhere in NAICS (under agriculture and information respectively), but historically they were considered to be manufacturing and were included in the industrial sector under the Standard Industrial Classification (SIC) system. In December 2002 the Federal Reserve reclassified all its industrial output data from the SIC system to NAICS.