Library
Market Notes


April 15, 2013
 View PDF
Good news, bad news for equity investors?
By: Thomas R. Pierce, CFA, Chief Investment Strategist
Wilmington Trust Investment Advisors

Key points

What is the market telling us?
The good news for U.S. equity investors is that the S&P 500 total return year-to-date through Friday April 12, 2013 was 12.09%. The bad news is that three counter-cyclical sectors have led the advance: healthcare at +20.57%, consumer staples with +17.32%, and utilities up +16.52%. These defensive sectors trounced two of the cyclical sectors, namely information technology and industrials, up +4.07% and +10.87, respectively. When defensive stocks lead performance, it typically does not indicate a great deal of positive conviction in the market outlook. Also, when central bank "easy money" is flowing, lower-quality, credit dependent equities tend to outperform. But we have seen the opposite with "widow and orphan" stocks leading the way: Johnson and Johnson (+18.98%), Abbot Labs (+18.04%), Proctor and Gamble (+18.91%), and Duke Energy (+15.64%), to name a few. Other bad news for equity bulls includes the very recent 37 basis point (0.37%) yield rally in the U.S. 10-year Treasury note from its 2013 high yield of 2.07% on March 11, along with lower-than-expected economic data across a number of indicators, including a huge "miss" on the University of Michigan consumer sentiment data. The rationale for the relative year-to-date outperformance of the blue chips includes relative pricing power, global reach, dividend increases, and share re-purchases in an environment that offers few high quality, high income alternatives. Equity bulls are likely to point to the recent announcement by the Bank of Japan on April 4 regarding significant bond purchases and thus potential for global asset price advances. We are carefully monitoring how and where this new source of liquidity will be deployed along with resolution of near-term oil and gold price weakness.

Conditions continue to evolve in Cyprus and Italy
Euro zone officials have confirmed that, when troubled banks require restructuring, non-insured depositors may be required to take haircuts before European Stability Mechanism (ESM) funds are provided. However, they also insist that Cyprus' expropriation of non-insured deposits to repay sovereign debts would not be a template in further sovereign debt restructurings. Share prices of euro zone financials indicate investor queasiness with these statements. In the meantime, negotiations to form a new Italian government continue, as recent data indicate some slippage in Italy's improving fiscal situation.

Surge in Japan, weak performance in China
The Japanese stock market has continued to surge, and the yen to decline, as the Bank of Japan begins to implement massive purchases of long-duration yen-denominated bonds. The yield curve is flattening as long-term bond yields fall. Japanese investors are looking at the "carry trade," borrowing in low-yield yen and investing in higher-yielding dollars or euros. This new round of credit creation and associated leverage is likely to support global asset prices. In the meantime, China is once again implementing administrative measures aimed at controlling non-bank credit issuance and purchases of multiple properties on credit. Chinese stock market performance has been weak: investors are looking for the new Chinese Politburo Standing Committee to clarify its overall economic and financial strategy. Lastly, investors throughout Asia appear to be discounting the threats emanating from the new North Korean leadership.




   Investments: • Are NOT FDIC-Insured. • Have NO Bank Guarantee. • May Lose Value. 

Wilmington Trust® is a registered service mark of Wilmington Trust Corporation, a wholly owned subsidiary of M&T Bank Corporation. Investment management and fiduciary services are provided by Wilmington Trust Company, a Delaware trust company, and Wilmington Trust, N.A., a national bank. Loans, retail and business deposits, and other personal and business banking services and products are offered by Manufacturers and Traders Trust Company (M&T Bank), member FDIC. Wilmington Trust Investment Advisers, Inc., a subsidiary of M&T Bank, is a SEC-registered investment adviser providing investment management services to Wilmington Trust and M&T affiliates and clients.

The information in Market Notes has been obtained from sources believed to be reliable, but its accuracy and completeness are not guaranteed. The opinions, estimates, and projections constitute the judgment of Wilmington Trust and are subject to change without notice. This commentary is for information purposes only and is not intended as an offer or solicitation for the sale of any financial product or service or a recommendation or determination that any investment strategy is suitable for a specific investor. Investors should seek financial advice regarding the suitability of any investment strategy based on the investor's objectives, financial situation, and particular needs. Diversification does not ensure a profit or guarantee against a loss. There is no assurance that any investment strategy will be successful.

These materials are based on public information. Facts and views presented in this report have not been reviewed by, and may not reflect information known to, professionals in other business areas of Wilmington Trust or M&T Bank who may provide or seek to provide financial services to entities referred to in this report. M&T Bank and Wilmington Trust have established information barriers between their various business groups. As a result, M&T Bank and Wilmington Trust do not disclose certain client relationships with, or compensation received from, such entities in their reports.

Any investment products discussed in this commentary are not insured by the FDIC or any other governmental agency, are not deposits of or other obligations of or guaranteed by M&T Bank, Wilmington Trust, or any other bank or entity, and are subject to risks, including a possible loss of the principal amount invested. Some investment products may be available only to certain "qualified investors"—that is, investors who meet certain income and/or investable assets thresholds. Past performance is no guarantee of future results. Investing involves risk and you may incur a profit or a loss.

CFA® and Chartered Financial Analyst® are trademarks owned by CFA Institute. Other third-party marks and brands are the property of their respective owners.

Indices are not available for direct investment. Investment in a security or strategy designed to replicate the performance of an index will incur expenses, such as management fees and transaction costs that would reduce returns.