A Fusion of Factors Weigh on the Markets

The Dow Jones Industrial Average (Dow) fell 0.96%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.54%, the Standard & Poor’s 500® Index (S&P 500) finished off 1.37% and the NASDAQ Composite Index (NASDAQ) shed 1.48%. Sector breadth was negative with all 10 of the S&P sector groups finishing lower. The Industrials (-2.05%) led the way lower followed by Energy (-1.88%) and Utilities (-1.80%).

September 29, 2014    |    By Mike Schwager

Performance for Week Ending 9/26/2014:

The Dow Jones Industrial Average (Dow) fell 0.96%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.54%, the Standard & Poor’s 500® Index (S&P 500) finished off 1.37% and the NASDAQ Composite Index (NASDAQ) shed 1.48%. Sector breadth was negative with all 10 of the S&P sector groups finishing lower. The Industrials (-2.05%) led the way lower followed by Energy (-1.88%) and Utilities (-1.80%).

Index* Closing Price 9/26/2014 Percentage Change for Week Ending 9/26/2014 Year-to-Date Percentage Change Through 9/26/2014





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 9/22/2014-9/26/2014

The major market indices finished the week broadly lower. While there was no specific catalyst to account for the selling pressure, it instead appeared to be a combination of the following: 1) signs that economic growth in both China and the Eurozone is faltering; 2) renewed geopolitical concerns following  media reports that Russia is  drafting legislation that would allow the government to seize foreign assets inside the country in response to the Western sanctions; 3) comments from Bank of England’s Carney reiterating his warning that rate hikes could come soon;  4) lingering concerns over an early rate “lift-off” by the Federal Reserve (Fed); 5) weakness in tech-bellwether Apple due to “bendgate” & iOS8 problems. Apple is one of the most widely held tech names and a major component of many indices; 6) concerns over the recent strength of the U.S. dollar and its potential impact on earnings growth; and 7) talk that reform of Japan’s Government Pension Investment Fund (GPIF) has been delayed (earlier this year there was talk that the fund would make big upward adjustment to equity allocation).

While the above noted items could continue to pressure the market in the near-term, it’s worth noting that last week’s sell-off occurred on very light volume, suggesting more of a “buyer’s strike” than a mass exit from the equity market.  In addition, the broader narrative surrounding the “bull case” still appears intact: The economy continues to improve, the Fed is committed to low interest rates, and overall market valuation remains fair. As noted a couple weeks back, only 20% of active fund managers are currently beating the market and the average equity hedge fund is up only about 3% through August. Anecdotal evidence also suggests that cash positions amongst active fund managers remain elevated. This underperformance coupled with elevated cash could limit downside risk as managers put cash to work in an effort to play catch-up heading into year-end. This scenario, in my opinion, should ultimately prove to be supportive of the continuation of the bull market – stay tuned.

Data Wrap Up:
Housing was the focus of last week’s economic calendar and the results were generally a mixed bag. The National Association of Realtors reported that existing home sales during the month of August fell 1.8% to an annual pace of 5.05M units. Results were below the 1.0% gain (5.20M units) expected by economists. However, on a positive note, the 5.05M pace of sales leaves the three-month average at 5.07M units, which is solidly above the 4.6M pace in Q1 and 4.87M pace recorded in Q2. Elsewhere, new home sales in August surged by 18% to a 504K annualized pace. The report was well ahead of economists’ expectations and left the index at the highest level in over 6 years. July sales were also revised higher (to 427K from 412K). 

Meanwhile, the Commerce Department reported that Durable Goods Orders during the month of August slipped 18.2%, however this followed a 22.5% surge in the prior month. While the “optics” of the oversized decline seemed to spook some investors, when the volatile transport component was factored out, durables actually rose 0.7%, slightly ahead of the +0.6% estimate. In addition, the capital goods non-defense (ex-aircraft) component of the report—which is used as a proxy for business spending—rose by 0.6%, also mildly ahead of expectations. On the labor front, initial jobless claims during the week ended September 20 rose 12K to 293K, slightly better than the 296K forecast.  The 4-week moving average—which helps to smooth the week to week volatility—fell to 298.5K and remains near the lowest level in over 8 years.

Mutual Fund Flows:
According to the Investment Company Institute (ICI), mutual funds saw outflows of $419 million during the most recent period. By asset class: Equity funds had total estimated inflows of $157 million as $1.98B of outflows from domestic equity funds were offset by $2.14B of inflows to world equity funds. Bond funds had estimated outflows of $755 million as $517M of inflows to muni funds were outweighed by $1.27B of outflows from taxable bond funds. Hybrid funds, which can invest in stocks and fixed-income securities, had estimated inflows of $179 million during the period. On a year-to-date basis, equity funds have seen positive inflows of $50.2B while bond funds have taken in $65.6B. Hybrid funds have had inflows of $32.2B.

The Week Ahead:
The focal point in the coming week will be Friday’s labor market report. After a disappointing showing last month, nonfarm payrolls are forecast to rebound smartly.  According to Bloomberg, consensus expectations are for nonfarm payrolls to rise to 215K and for the unemployment rate to remain stable at 6.1%. Other reports of interest include; the August personal spending and income data, August pending home sales, the July S&P Case-Shiller Home Price Index, the September Chicago Purchasing Managers Index (PMI), the Conference Board’s Consumer Confidence Index and the September ISM Manufacturing Index. On the earnings front, only four members of the S&P 500 are scheduled to report results. Earnings season won’t kick into full gear until the week of October 13 when 61 S&P members report results. The Fed speaking calendar will be relatively light with only four Fed Heads on the docket.  Other events of interest include Thursday gathering of the European Central Bank where investors are expected to gather the details on the recently announced Asset Backed Security (ABS)/covered bond purchase program.


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.

S&P Case-Shiller Home Price Index is a group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain metropolitan statistical areas (MSA) as well as a national index.

Purchasing Managers Index (PMI) is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Consumer Confidence Index (CCI) is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

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.

Past performance is no guarantee of future results. 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.

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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 guarantees 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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