Wednesday, April 01, 2015

The U.S. Stock Market is Hostage to Macro Themes

Has the U.S. stock market been strong or weak so far in 2015?  As the above three charts from the excellent FinViz site indicate, the answer very much depends on the segment of the market you've been following and trading.

With respect to stock sectors, consumer discretionary and healthcare shares have performed well.  Note the strength in housing stocks (XHB) and retail shares (XRT), for example.  Commodity-related shares have been consistent underperformers.  Global economic weakness has contributed to commodity weakness, particularly in oil, which has been perceived as a boost for consumers.  Concerns over a normalization of interest rates by the Fed has hurt interest-rate sensitive shares such as utilities. 

Small and midcap stocks have performed well so far in 2015, but large cap stocks are relatively flat and mega cap shares are actually down on the year.  The idea here is that a strong U.S. dollar hurts large companies that depend on overseas sales, but a strong consumer economy can benefit small and medium sized domestic firms.  If you've equated the stock market with capitalization-weighted indexes, you've had a distorted picture of performance.

Finally, on the bottom chart, take a look at U.S. listed shares as a function of their country of origin.  Shares from Greece and Brazil have been hurt greatly; shares from much of Europe and Japan have performed well; and U.S. shares are relatively flat.  Stocks in countries that have been implementing quantitative easing programs (Europe, Japan) have been stronger than those exiting those programs (U.S.).

All this means that stocks, to a fair degree, have been hostage to macro themes.  Two visions of the future collide:  1)  The pace of economic growth in the U.S. slows and strong consumer and smaller cap shares roll over with the commodity shares and large caps; or 2) Global growth picks up and lifts the weaker segments of the market as part of a reflation trade.  I'm watching the stock market leaders and laggards closely to handicap those scenarios.

Further Reading:  Five Macro Themes Influencing the Market