/perspectives/weekly-viewpoint/‘spring-break’-proves-short-lived-(at-least-for-no

‘Spring Break’ Proves Short Lived (at least for now)

The Dow Jones Industrial Average (Dow) rose 2.06%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.28%, the Standard & Poor's 500® Index (S&P 500) gained 2.29% and the NASDAQ Composite Index (NASDAQ) tacked on 2.84%.

April 15, 2013    |    By Mike Schwager

Performance for Week Ending 4/12/13:

The Dow Jones Industrial Average (Dow) rose 2.06%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.28%, the Standard & Poor’s 500® Index (S&P 500) gained 2.29% and the NASDAQ Composite Index (NASDAQ) tacked on 2.84%. Sector breadth was positive with all 10 of the sector groups finishing higher. The Consumer Discretionary sector (+3.36%) led the way higher followed by Healthcare (+3.28%) and Consumer Staples (+2.58%).

Index* Closing Price 4/12/2013 Percentage Change for Week Ending 4/12/2013 Year-to-Date Percentage Change Through 4/12/2013

Dow

14865.06

+2.06%

+13.44%

Wilshire 5000

16450.76

+2.28%

+11.46%

S&P 500

1588.85

+2.29%

+11.41%

NASDAQ

3294.95

+2.84%

+9.12%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 4/8/13 - 4/12/13

The major market indices finished the week solidly higher as investors took advantage of the prior week’s sell-off to “buy the dip.” In general, the markets continue to benefit from knowing that the Federal Reserve (FED), as well as most global central banks, will keep their foot firmly on the monetary gas pedal for the foreseeable future. In addition, while economic growth may have hit a near-term “soft-patch,” there are few signs of recession. The market’s valuation also remains supportive and first quarter earnings season is off to a better than expected start.

Markets Typically Climb a Wall of Worry
Despite the S&P 500 hitting a new all-time high last week, individual investors remain cautious as suggested by the most recent American Association of Individual Investors (AAII) weekly poll. The poll noted that Bearish sentiment (i.e. expectations that stock prices will fall over the next six months), surged by 26.3 percentage points to 54.5%. This was the third largest one-week increase in pessimism recorded since the survey started in 1987. The rise also put bearish sentiment at an extraordinarily high level (more than two standard deviations above its historical average). As pointed out in these missives over the years, investment decisions, in their simplest form, are made with emotions – fear & greed. Investors tend to be the greediest at market tops and the most fearful at market bottoms. Since sentiment tends to be a contrarian indicator, I believe the elevated levels of bearishness by individual investors suggests the current rally may still have some near term upside.

First Quarter Earnings, So Far, So Good
First quarter earnings season kicked off on a positive note with overall results coming in solidly above analysts’ forecasts. Through Friday, 31 members of the S&P 500 reported quarterly earnings with overall results up by 15.8% (note: coming into the quarter expectations were for a decline of 1.8%). Of the 31 companies, 64.5% have beaten expectations while 22.6% have fallen short. The current “beat” rate is moderately ahead of the 61% long-term average.

As mentioned last week, the bar heading into quarterly reporting season has been set extremely low following a wave of companies pre-announcing poor results. According to Strategas Research, the number of companies issuing negative earnings guidance outnumbered those giving positive guidance by almost 5 to 1 – the highest ratio since 2001. Given the proclivity of many companies to under-promise and over-deliver, a high negative to positive ratio has historically led to strong markets during the reporting season. In other words, low expectations could set the stage for a relief rally as there now appears to be plenty of room for upside surprises.

Economic Roundup
The focal report last week was Friday’s Retail Sales data. The Commerce Department reported that Retail Sales during the month of March fell by 0.4%, well short of the unchanged (0.0%) reading expected by economists. Sales excluding Autos also fell by 0.4%. The drop in Retail Sales was the largest in 9 months and likely reflects the recent slowdown in the labor market and the lagged impact of the payroll tax increase. Elsewhere, the Labor Department reported that initial jobless claims during the week ended April 6 fell by 42K to 346K. Results were solidly below the 360K expected by economists.  However, the 4-week moving average—which helps smooth the week to week volatility—rose to 358K, the highest level since mid-February.

FOMC Meeting Minutes
The March Federal Open Market Committee (FOMC) Meeting minutes contained no real surprises, stating that "all but a few" FED officials agreed that they wanted to keep the program going "at least through midyear." The threat of higher rates however has since diminished significantly. Seeing that the report was prepared ahead of a series of high profile economic data points (ISM indexes, Payrolls), the statement was viewed as “stale” and little now believe the FED will begin tapering off their buying activity before at least year-end. This thought process was underscored by dovish rhetoric from FED Chairman Bernanke who said that the economy is still far from desired performance level. Bernanke’s comments helped to assuage fears that the FED would begin to taper off its bond buying program any time soon.

The Week Ahead:
The earnings calendar will be front and center over the next few weeks. This week 74 members of the S&P 500 are scheduled to report first quarter results followed by 171 in the next week. The economic calendar will also be closely watched with the focus on the Empire Manufacturing Index, Housing Starts, the Leading Indicators report and Weekly Jobless Claims. FED Heads will be out and about this week with eleven speeches scheduled throughout the week. Other data points of interest include Wednesday’s release of the FED’s Beige Book and an updated World Economic Outlook report from the International Monetary Fund (IMF) on Tuesday.


Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no gua rantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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