What the Market Wants: An adult-minded Congress, a modicum of leadership, and an end to manufactured crises!

The U.S. markets started off the day negative, following the 3.7% plunge in the Shanghai Composite which reflected Beijing’s latest efforts to curb home prices. a mid-day rally turned things around, and the major indices closed up for the day, with the S&P 500 Index gaining 0.46% to close at 1525.20. The Dow closed at 14,127.82, up 0.27%, and the Nasdaq Composite gained 0.39%, closing at 3182.03.

The dreaded sequestration went into effect on Friday, and the market continues to be nervous about how it will play out. That was evident in today’s “flight to safety” with Utilities, Healthcare, Telecom and Financials in the top five, although Consumer Cyclicals topped the list, which was a bit surprising.  Market sentiment seems to be that Congress will do little or nothing this month as the first effects of the budget have been relatively mild, like the cancelation of air shows by the U.S. Navy Blue Angels and the U.S. Air Force Thunderbirds. That attitude is likely to change as sequestration cuts begin to affect more sensitive areas like school funding and Medicare.

Economic reports. The economic news was good for most of the week, with the housing industry reflecting home price increases from Case Schiller and better-than-projected numbers for both new home sales and pending home sales. Positive surprises came from consumer confidence and the Chicago PMI, both solidly above forecasts; durable goods, excluding aircraft sales; jobless claims, which fell back towards last year’s low; and very positive testimony from Fed Chairman Bernanke with regard to continuing the stimulus as previously projected.

Friday’s reports were mixed.  Personal income disappointed a bit, down -3.6% in January against an expected -2.4%, but personal spending came in as expected, +0.02% in January. 

Consumers surprised everyone with a burst of positive sentiment that sent the Reuter's/University of Michigan's consumer sentiment index to 77.6 for February, besting the 76.3 mid-month reading.

Manufacturing reports were mixed. The PMI manufacturing index slowed from a mid-month flash reading of 55.2 to a final February reading of 54.3; January’s PMI index was 55.8.  The ISM’s manufacturing report, on the other hand, was better than expected, at 54.2 -- and it was up 1.1 points from the previous month’s 53.1 level.  Construction spending was much worse than expected, down -2.1% against an expected +0.6%.

This week brings several important reports. Tuesday, ISM services are expected to be up slightly; Wednesday, factory orders are expected to drop, and the ADP Employment Report is expected to be down fairly sharply. Thursday, initial jobless claims are expected to be worse (higher than last week’s 344 K); productivity is expected to improve a bit; and our international trade balance is expected to increase from $38.5 billion to $43.0 billion.

Market Stats.  It has been a mid-cap playground for the past 12 months, with mid-caps of one style or another leading by a significant margin in all time periods. Last week, Mid-cap Growth significantly outperformed all other cap/styles (+0.73%), but for all previous periods Mid-cap Value reigned.  Small caps were negative across the board last week, while large caps were mixed. Large caps tend to have a lot of multi-national companies in the mix, which are more sensitive to global issues.

With regard to sectors, Consumer Cyclicals led the week (+1.22%), followed by Utilities (+0.76%), Healthcare (+0.73%), and Telecommunications (+0.14%).  Industrials kept its head in positive territory, just barely (+0.06%), but the rest of the sectors were all negative.

The Sabrient SectorCast shows Technology as the best forward-looking sector, followed by Financials, and Healthcare. With the exception of Healthcare, the flight-to-safety sectors fell to the bottom in our forward outlook.

Here are the market stats.

So much depends on the sequestration. Either Congress and the President will start learning how to play together for the good of the country, or the automatic budget cuts will take effect which will send ripples if not major quakes through the entire economy. Nevertheless, there is still money coming into the market from the sidelines, and although most indices are flirting with all-time highs, valuations are fairly reasonable at this point, based on the current earnings outlook for the year. To that end, we’re offering three GARP stock ideas even as we suggest that this is a good time to stay hedged.

3 Stock Ideas for this Market

This week I used the GARP (Growth at a Reasonable Price) preset search in MyStockFinder. Here are three stocks for your consideration.

NTI (Northern Tier Energy LP), Energy Sector, Mid-cap ($2.93 B)

  • Stock price has more than doubled since the Northern Tier IPO on July 31, 2012
  • Projected to grow at 25% per year for next 5 years
  • P/E of 8.74 with forward P/E of 8.52
  • 17% dividend yield (NTI declared $1.48 Q3 dividend and a $1.27 Q4 dividend)

PFG (Principal Financial Group, Inc.), Financial Sector, Large-cap ($9.3 B – a “small” large cap)

  • Trading at 12x current earnings and 8x forward earnings
  • 20% projected growth rate this year; 13.6% next year; 11% long-term projected growth rate
  • 9 out of 11 analysts have raised 2013 earnings estimates in last 30 days; 6 out of 9 have raised 2014 estimates

ESRX (Express Scripps Holding Company), Healthcare Sector, Large-cap ($47.4 B)

  • Trading for 11.76x forward earnings
  • 15 of the 17 analysts have raised earnings estimates in last 30 days
  • 2013 projected growth rate of 14.2%; 2014 projected growth rate of 15%; long-term projected growth rate of 17.7%
  • A Sabrient Baker’s Dozen 2013 stock pick

Until next week,

David Brown
Chief Market Strategist
Sabrient Systems

Follow us on Twitter: @sabrientsystems and @ScottMartindale

Full disclosure:  The author does not hold positions in any of the stocks mentioned in this article.

© 2012 Sabrient Systems, LLC

What the Market Wants