February 2013 Equity Market Review
By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.
The U.S. equity market continued its strong start to 2013 in February as investors looked past the federal budget sequester and focused on better-than-expected corporate earnings and mostly positive U.S. economic data. However, political turmoil in the eurozone and concerns about slower growth in China weighed more on international equity markets and contributed to their weaker performance. For the month, the Standard and Poor's (S&P) 500, Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 1.36%, 1.34%, 1.10%, -0.95%, and -1.26%, respectively. Value stocks outperformed growth stocks during the month, and within the Russell 1000 Index, Consumer Staples, Industrials, and Utilities were the top-performing sectors, while the Materials, Information Technology, and Energy sectors lagged.
U.S. Economic Data Continues to Improve
U.S. policymakers were unable to reach a deal that avoided sequestration, prompting $85 billion in automatic spending cuts to take effect, but there seemed to be minimal impact on investor sentiment as market participants focused on the continuously improving U.S. housing and labor market data released during the month. Rising home prices, a mending job market, and significant stock market returns year-to-date also contributed to a rebound in consumer confidence in February.
The earnings season finished strong with 67% of S&P 500 companies beating earnings expectations and 65% topping revenue forecasts.
U.S. fourth quarter GDP was revised up during the month, indicating the U.S. economy grew at a 0.1% annual rate compared to the initially reported 0.1% downturn. The upward revision was driven largely by better trade data than was first estimated as energy-related exports rose to a record high while oil imports continued to decline.
Fed Maintains Accommodative Monetary Policy
FOMC minutes released in February highlighted the growing debate about the appropriate time to scale back the most recent round of quantitative easing, but Federal Reserve Chairman Ben Bernanke confirmed in his testimony to Congress during the month that asset purchases would continue until there are substantial improvements in the labor market.
Political Turmoil Resurfaces in Eurozone, While China's Economic Growth Shows Signs of Stabilizing
In the eurozone, political uncertainty in Italy reignited the region's sovereign debt crisis as Italian voters supported parties promising to scale back austerity measures, while German opposition to direct bank recapitalizations from European Stability Mechanism (ESM) funds threatened to derail the possibility of eurozone banks accessing bailout funds directly.
Core European economies continued to be impacted by the region's recession as France reduced its 2013 growth outlook by half and the U.K. had its AAA credit rating cut by Moody's.
The material slowdown in emerging markets also continued in February as China's manufacturing PMI slowed and foreign direct investment declined on a year-over-year basis for an eighth consecutive month. Although the impact of the eurozone recession will likely continue, with exports rising 25% in January from a year earlier, the Chinese economy did show signs of stabilizing.
We anticipate that 2013 will be a good year for U.S. equities as investors look past the political dysfunction in Washington and move more money into stocks as they become more comfortable with risk. Value stocks generally performed better than growth companies in the second half of 2012, and we believe that this trend may persist in 2013 as risk aversion continues to subside. We also think that small-cap equities are poised to post better returns than large-caps, driven by healthy earnings and top-line results as well as global M&A activity. Finally, environmental, social, and governance (ESG) issues could become more prominent factors in individual stock performance in 2013 as the flow of information becomes more seamless and consumers become more aware of the impacts of ESG factors. As a result of these broad equity market trends, active equity managers should regain their ability to help investors benefit in 2013.
In the wake of the U.K. losing its AAA rating, there seems to be little marketplace focus on how the dysfunctional U.S. political process could negatively impact the credit rating of U.S. government debt. Any discussion of a downgrade by a credit-rating agency could once again upset investor sentiment and ignite market volatility. Overall, however, the United States remains in the driver's seat of the global economy for the time being, with the rest of the world benefiting from continued U.S. economic growth, however tepid.
As risk aversion subsides and investors are less willing to accept tiny—or negative—inflation-adjusted yields from Treasuries, we are likely to see the performance spreads between equities and fixed-income securities reverse from their historically low levels and return to longer-term historical averages. From a relative valuation point of view, stocks are still very attractive relative to bonds.
Equity markets started 2013 having gained a tremendous amount of ground since the depths of the financial crisis. A recovering U.S. housing market, a decline in unemployment, record-high exports, and encouraging year-end manufacturing data fueled by an attractive U.S. dollar exchange rate have all helped boost U.S. equity market sentiment. However, with earnings season winding down and few positive catalysts on the near-term horizon, a short-term pull-back in equities remains a distinct possibility.
This commentary represents the opinions of the author as of 3/27/13 and may change based on market and other conditions. These opinions are not intended to forecast future events, guarantee future results, or serve as investment advice. The statistics have been obtained from sources believed to be reliable, but the accuracy and completeness of this information cannot be guaranteed. Neither Calvert Investment Management, Inc. nor its information providers are responsible for any damages or losses arising from any use of this information.
Accounts managed by Calvert Investment Management, Inc. may or may not invest in, and Calvert is not recommending any action on, any companies listed.
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