The market appeared to tire out at the higher levels this past week, even though the S&P did continue its 2013 winning streak by advancing for the seventh straight week, albeit by a very nominal amount for a 0.1 percent advance. This streak is the longest since December 2010 to January 2011 and the index is now ahead by 6.6 percent for the year. The Dow Jones Industrials and the Nasdaq both ended nominally lower, as each declined by 0.1 percent, which shows that the major averages sort of spun their wheels without making much upside progress. The Russell 2000 Index of small-cap stocks, the mid-cap indexes and the Dow Jones Transportation Average all continued their merry journeys higher as they all attained new record levels. And continuing the trend as pointed out in last week’s column, the S&P once again was lower on Monday for the sixth time this year, which means that despite its seven straight weeks of advances, it has declined every first day of the week that the market has been open with the exception of the January 21 Martin Luther King legal holiday. Financial markets were also closed this past Monday in observance of President’s Day, so there will now have been eight weeks of trading in 2013 with only six Mondays.
The market was able to maintain its gains despite the fact that retail sales barely rose in January as higher payroll tax deductions due to the expiration of a two percent payroll tax cut and higher gasoline prices restrained spending, which suggested that the economy did not get much help from consumers at the start of the year. These sales edged up by a meager 0.1 percent after advancing by 0.5 percent in December.
One slightly encouraging aspect of the sales report was that core sales, which exclude autos, were a bit stronger in both Nov. and Dec. than previously reported. In addition, businesses outside autos accumulated slightly more inventories than originally predicted, which means that taken together with a narrower trade deficit in December, the data suggests that the next estimate of fourth-quarter G.D.P. will be revised higher later this month.
Other economic reports showed that weekly jobless claims declined by 27,000 to 341,000 and that was important because this is the survey week that will be used for the February jobs report to be released early next month. In addition, the February NY State Empire Manufacturing Survey showed its first gain in seven months and the preliminary February University of Michigan Consumer Sentiment Survey rose to a three-month high.
U.S. merger and acquisition activity has surged in the first two months of the year, as advancing equity markets and very low interest rates give companies renewed confidence to pursue large takeovers that they had stayed away from during the past few years. The announcement that Warren Buffett’s Berkshire Hathaway would buy ketchup maker H.J. Heinz Co. was the most dramatic deal so far in 2013, whose total has now reached $158.5 billion.
That is more than twice the activity in the same period last year and this total accounts for 57 percent of global deal volumes. The strong showing in U.S. deal making contributed to a 16.5 percent rise in worldwide merger and acquisition volumes to $276 billion compared to the same period a year ago. This total marks the highest level since the 2007 deal-making heyday when global deal volumes reached $407.5 billion.
This past Thursday alone saw a trio of mega-deals that included the $23 billion takeover of Heinz by Berkshire Hathaway and Brazilian private equity firm 3G Capital, the merger of American Airlines and U.S. Airways Group and the revised $20 billion takeover of Mexican brewer Grupo Modelo by Anheuser-Busch.
Such deal making could continue because all of the ingredients are in place for this type of activity to pick up, as financing is cheap and available, companies have cash on their balance sheets and the equity market has improved as well.
And as has been pointed out now week after week, one of the primary reasons for the steady market advance this year has been that fourth-quarter earnings have generally surprised to the upside, as with around 400 of the S&P companies having reported, 72 percent of them have beaten the earnings consensus and 68 percent have beaten on the revenue side as well. Earnings are now projected to show a gain of 5.6 percent and readers of this column have observed the steady advance every week in this percentage, as profits were initially to be estimated to grow at 1.9 percent when the earnings reporting period got underway last month. The percentage of companies that have beaten consensus earnings estimates has been 65 percent over the past four quarters and 62 percent since 1994, which is further testament to the strength of this reporting period as well.
The chances for further near-term market advances could decrease as the fourth-quarter earnings season draws to a close and the market bumps into strong technical resistance levels. For instance, this past Thursday there was a report that Wal-Mart, the largest retailer in the world, saw its February sales decline significantly. They are due to announce their earnings tomorrow and this will unofficially close out the fourth-quarter reporting period. Its numbers will therefore be closely watched in light of the negative news that sent its stock down sharply.
The approaching March 1 deadline for across-the-board federal budget cuts, known as sequestration (scheduled to occur unless Congress reaches a compromise), will add another layer of uncertainty. Senate Dems unveiled a $110 billion plan last week to delay these cuts, and included tax increases that Republicans already say they will not accept. The plan would postpone the March 1 start of more than $1 trillion in cuts until 2014, replacing them with defense-spending reductions, a halt in direct payments to farmers and a tax increase that would impose a minimum 30% rate on top earners.
The market will also focus on today’s release of the minutes from the last F.O.M.C. meeting, which could provide support to stocks if they suggest that the Fed will continue its current program of aggressive monetary easing. The minutes released last month did cause the market some concern when they revealed that a number of Fed officials thought it would be appropriate to consider ending asset purchases later this year.
Donald Selkin is the Chief Market Strategist at National Securities in New York, a veteran in the securities industry for 36 years who is widely quoted in the financial media.
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