Calvert News & Commentary

Focus on Equities for February 2014

3/10/2014

Untitled Document

By Natalie Trunow, Chief Investment Officer, Equities, Calvert Investment Management, Inc.

Natalie Trunow, CIO of Equities Natalie Trunow,
CIO, Equities

Equity markets rebound...

Equity markets rebounded from a mild correction in January, benefiting from strong corporate earnings reports and renewed investor confidence that weaker economic data was more a byproduct of inclement weather, rather than reflecting a broader economic slowdown. Most major indices erased January's losses and finished February in positive territory for the year-to-date period, with the exception of emerging markets, which remained down for the year due to fears of a slowdown in China and geopolitical turmoil in Ukraine. For the month, the Standard and Poor's (S&P 500), Russell 1000, Russell 2000, MSCI EAFE, and MSCI Emerging Markets Indices returned 4.57%, 4.75%, 4.71%, 5.56%, and 3.31%, respectively. Growth stocks outperformed value stocks, with the Russell 1000 Growth Index returning 5.15% while the Russell 1000 Value returned 4.32%.

with cyclical sectors in the lead...

Looking at sector performance, materials, consumer discretionary, and healthcare were the top performers in February, while telecoms, financials, and utilities lagged. After trailing in January, cyclical sectors outperformed in February, indicating market participants were more comfortable with equity risk, and were betting on a continued U.S. economic recovery.

...despite bad weather.

Weather matters. Markets recovered in February as investors were more willing to attribute recent negative surprises in U.S. economic data — particularly the sharp decline in housing starts and building permits, and lackluster job growth — to the unusually harsh winter weather. Fed Chair Janet Yellen supported this view during her testimony in front of the Senate Banking Committee at the end of February, noting that unseasonably cold weather has played a significant role in much of the softer data seen of late. Equity markets also found support in Yellen, as she reiterated that the Fed would be open to reconsidering its tapering path should the economic outlook change significantly, and it emerged that weather was not the main factor in recent economic weakness.

U.S. corporate earnings fuel investor enthusiasm...

Better than expected corporate earnings in the U.S. similarly propelled markets in February, with 68% of companies in the S&P 500 beating earnings expectations while posting year-over-year growth of 8.7%. Top-line growth however decelerated, with revenues up just 0.75%. At this point, it seems that expectations for a sustained economic recovery have largely been reflected in valuations, so it's not surprising to see a pull-back when the global growth outlook comes into question, which we saw in January. That said, more than 80% of global PMIs indicate expansion of economic activity, so a synchronized global recovery still provides a favorable environment for multiple expansion in the long-term.

...dismissing growth issues in emerging markets.

The main risk on investors' minds this year has been the potential for slower growth from emerging markets, which remained in focus during the month as political upheaval in Ukraine culminated with Russian forces occupying the Crimea region. Although tensions have eased, the situation continued to negatively impact emerging market stocks and currencies which were already coming under pressure due to the prospect of a slowdown in China and the reversal of the carry trade. The China HSBC Manufacturing PMI declined further in February, signaling the first contractions of both output and new orders since last July.

Short-term volatility notwithstanding, U.S. economy and equity markets are likely to do well in 2014.

Concerns about growth in emerging markets, and the return of geopolitical turmoil to the headlines have effectively injected more risk into markets, with investors taking a more cautious approach toward equities as a result. In the short term, this has been positive for U.S. treasuries, evidenced by their outperformance relative to stocks year to date, and bond-fund inflows compared to equity-fund outflows. However, from a longer-term perspective, bond prices are likely to come under greater pressure as the Fed continues to wind down its asset purchase program. We also believe the U.S. can still compensate for a dampened global growth outlook and we expect the economic recovery to re-accelerate in the second half of the year on the heels of continued improvement in the housing and labor markets. The fact that consumer confidence has held up in spite of the bad weather is a good sign. At the same time, a more cautious market environment, if it persists, can bode well for active managers. This can also trigger renewed focus on company fundamentals and a better environment for active managers going forward.

This commentary represents the opinions of the author as of 3/7/14 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. Calvert may have acted upon this research prior to or immediately following publication. In addition, 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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