By Wallace Witkowski, MarketWatch
SAN FRANCISCO (MarketWatch) -- After the worst week for stocks
in over a year, investors face a Federal Reserve meeting, an
earnings deluge including Apple Inc. and Facebook Inc., plus a host
of economic data.
On Friday, the Dow Jones Industrial Average (DJI) dropped 2%, or
318 points, its worst one-day percentage drop since June 20. It
also fell 3.5% for the week, its worst weekly decline since Nov.
25, 2011, with the pain compressed into four sessions after
Monday's holiday. Similarly, the S&P 500 Index (SPX) shed 2.6%
on the week, with the Nasdaq Composite Index (RIXF) declining
1.7%.
While a flight from emerging-markets currencies and weak
economic data out of China were cited as triggers for Friday's
selloff, investors may have seen this as a good time to lock up
some profits from the S&P 500's 30% rise in 2013, said John
Canally, economic and investment strategist at LPL Financial.
"You can argue that it was profit-taking and investors not
wanting to take the tax hit this year," Canally said.
It's a reasonable argument given the types of stocks bearing the
brunt of the pain. The four-worst performing sectors on the S&P
500 Index for 2014 are the same ones that hit their 52-week highs
on Dec. 31. Since the beginning of the year, the materials sector
has fallen 5.1%, consumer discretionary stocks are down 5%, while
industrials and energy stocks have both shed 4.9%. The S&P 500,
on the other hand, is down 3.1%.
Consumer discretionary stocks were 2013's best performing sector
with a 40% gain, and they're also more vulnerable to a pullback.
It's the least favorite sector of Brian Belski, chief investment
strategist at BMO Capital Markets. Belski called the sector
overbought and very expensive as retail faces major structural
headwinds with the growth of online shopping and too much
capacity.
"Consumer discretionary's been up for six years straight,"
Belski said. "Never before has a sector performed like that for six
consecutive years, so we'll take the other end of that trade."
Big names in the sector reporting earnings this week include
Ford Motor Co. (F) and Comcast Corp. (CMCSA) on Tuesday, and
Amazon.com Inc. (AMZN), Viacom Inc. (VIA) (VIA), and Chipotle
Mexican Grill Inc. (CMG) on Thursday.
Investors, however, are focusing too heavily and reacting to
quarterly earnings, and need to focus more on trajectories and
trends, according to Belski.
"The forest through the trees shows that sales growth is
actually pretty good," he said.
So far, quarterly sales for the S&P 500 have grown 0.7%,
compared with a one-year average 0.4% quarterly growth and a
four-year average of 0.6% growth, according to John Butters, senior
earnings analyst at FactSet. While the percent of companies beating
the Wall Street consensus is below average for earnings (68% of
companies versus the four-year average of 73%), more companies are
surprising on revenue to the upside (67% versus the four-year
average of 59%), according to Butters.
Read: For S&P 500 companies, 4th-quarter earnings are a
mixed bag
Here comes peak week of earnings
With the peak week of earnings season on tap, nearly one-third
of Dow components report, and a quarter of the companies on the
S&P 500 index are scheduled to release quarterly results. So
far, about a quarter of the S&P 500 has reported and more than
a third of Dow components have reported.
Dow components include Caterpillar Inc. (CAT) on Monday; DuPont
(DD), Pfizer Inc. (PFE) , and AT&T Inc. (T) on Tuesday; Boeing
Co. (BA) on Wednesday; 3M Co. (MMM), ExxonMobil (XOM), and Visa
Inc. (V) on Thursday; and Chevron Corp. (CVX) on Friday.
But by far, the biggest name early in the week will be Apple
(AAPL), which reports Monday after the bell. Results will include
the ever-important Christmas and holiday season.
Other big tech earnings include Yahoo Inc. (YHOO) on Tuesday;
Facebook Inc. (FB) and Qualcomm Inc. (QCOM) on Wednesday; and
Google Inc. (GOOG) on Thursday. Even with a 1.7% loss since the
beginning of the year, the tech sector is the third-best performing
of the S&P 500's 10 sectors.
Other S&P 500 earnings of note include Amgen Inc. (AMGN),
Biogen Idec Inc. (BIIB), Dow Chemical Co. (DOW), Eli Lilly &
Co. (LLY) , ConocoPhillips (COP), United Parcel Service Inc. (UPS),
McKesson Corp. (MCK), MasterCard Inc. (MA), and AbbVie Inc.
(ABBV).
The peak of earnings season, however, has to compete with
central bank catalysts this week.
Let's not forget about the Fed
On Wednesday, the Federal Open Market Committee will wrap up its
two-day meeting (the last with Fed Chairman Ben Bernanke) with an
additional $10 billion taper of asset purchases widely expected. In
December, the Fed said it would trim $10 billion from its $85
billion-a-month in asset purchases.
LPL's Canally said this week's big mover will be what the Fed
decides to do about additional tapering.
Also, he said emerging-market central bank events this week will
get closer scrutiny given last week's emerging market retreat. The
Reserve Bank of India will release its third-quarter review and
monetary policy statement on Tuesday, while Banco de Mexico plans
to release it monetary policy statement on Friday.
In addition to all this, investors will have a fair amount of to
digest.
December new home sales data comes out on Monday, with durable
goods orders and the consumer confidence index out on Tuesday. On
Thursday, fourth-quarter GDP data is released along with jobless
claims. Then, on Friday comes December consumer spending figures,
along with the January Chicago PMI, and University of Michigan
consumer sentiment index.
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