EmailLast week was just about a perfect start to 2013 for the equity market. Every sector advanced; a buy-on-the-dip mentality was evident; and the S&P 500 closed at its highest level since December 2007.
In the process, the CBOE Volatility Index, which measures implied volatility of S&P 500 index options, collapsed. The VIX Index, known popularly as the market's "fear gauge," plunged 37% last week.
The avoidance of the fiscal cliff had almost everything to do with that. One could tell as much in the countervailing performance of the Treasury market, which saw the 10-year note flirt with 2.00% as stocks rallied and concerns percolated that the Fed could pull back on its accommodation much sooner than expected.
The Treasury market settled down some on Friday following word the December unemployment rate held steady at 7.8%. which is well above the Fed's 6.5% threshold. The 10-yr yield closed the week at 1.90%.
Things begin anew this week and the cash market looks poised to start things on a slightly lower note. The S&P futures are off just over two points, but are trading 0.4% below fair value.
The downward bias has the semblance of a profit-taking move since there isn't much news to account for the negative disposition.
Leading Republicans and Democrats continue to sound as if they are intent on holding their ideological lines when it comes to further fiscal reform efforts and the debt ceiling debate. This is nothing new, however, It was a known entity last week when stocks were rallying.
Separately, the financial sector received some good news when the Basel Committee on Banking Supervision endorsed a plan that allows banks an additional four years (until 2019) to meet minimum liquidity standards. Bank of America (BAC), meanwhile, reached a $10 bln settlement with Fannie Mae on outstanding mortgage claims.
Shares of BAC are trading 1.3% higher in premarket action, yet the broader market isn't following suit. The S&P 500 Financial Sector led the market last week with a 5.4% gain.
This week will mark the official start of the fourth quarter reporting period. Dow component Alcoa (AA) kicks things off with its report after the close tomorrow. Earnings releases pick up in earnest the following week.
According to FactSet, fourth quarter earnings are expected to be up a meager 2.4% in aggregate and just 0.4% if financials are excluded. Fourth quarter revenue is expected to increase 2.1%.
The market has managed to look past weakening earnings trends thanks to the Fed's actions. However, if warnings abound and companies start announcing new layoffs in a bid to protect profit margins, which are already near record levels, the Fed's floor of support could get slipperier.
There isn't much economic data to speak of this week outside of the initial claims and trade balance reports on Thursday and Friday, respectively. The ECB and Bank of England will be holding policy meetings on Thursday. They will provide some intrigue along with Thursday speeches on the 2013 economic outlook from Kansas City Fed President George and St. Louis Fed President Bullard, both of whom are new voting FOMC members this year and have a less dovish view than their counterparts.
