Stock Report For Week Ended July 18, 2014
Stocks mixed as geopolitical concerns dampen sentiment
Most benchmarks ended the week higher as enthusiasm about better-than-expected earnings at several prominent companies offset geopolitical concerns. The focused Dow Jones Industrial Average fared best and managed to establish a new high on Wednesday. The Russell 2000 Index, which measures the stock performance of smaller companies, sank as investors reacted to news that Federal Reserve policymakers considered small-caps valuations stretched. The S&P MidCap 400 Index was roughly flat for the week.
Ukraine and Gaza prompt biggest decline since April
The S&P 500 Index saw its steepest decline since April on Thursday, following news that a Malaysian Airlines jet had apparently been shot down over Ukraine—a tragedy that was quickly attributed to Russian-backed separatists in the region. News later in the day of an Israeli ground invasion of the Gaza strip also contributed to selling pressure. Markets in the U.S. rebounded on Friday, however, as investors appeared to determine that both events would have a manageable impact. Better-than-expected earnings results from Google also provided a particular boost to the tech sector.
Investors welcome bank earnings
Banking giant Citigroup established a positive earnings tone for the week on Monday, when it announced a smaller-than-expected decline in profit growth, thanks in part to favorable trading volumes. Investors were also pleased to see a settlement with the government over bad mortgage loans.
Valuation comments from Fed spook small-cap investors
The turmoil among small-caps occurred Wednesday, following congressional testimony from Fed Chair Janet Yellen. The testimony was accompanied by a monetary policy report from the Fed, which stated that "valuation metrics in some sectors do appear substantially stretched—particularly those for smaller firms in the social media and biotechnology industries, despite a notable downturn in equity prices for such firms early in the year."
Tech analysts see reasons for patience with valuations in the sector
Opinions about valuations vary among T. Rowe Price managers, but analysts covering high-growth sectors, such as technology and biotechnology, generally agree that a patient approach is warranted with leading companies—even if high valuations based on current earnings make them susceptible to pullbacks. Favorably positioned firms are seizing market share from traditional competitors, which should create opportunities for durable earnings growth, in many cases.