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
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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