/perspectives/weekly-viewpoint/a-looming-battle-between-greed-gravity

A Looming Battle between Greed & Gravity

The Dow Jones Industrial Average (Dow) rose 0.81%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.67%, the Standard & Poor's 500® Index (S&P 500) added 0.61% and the NASDAQ Composite Index (NASDAQ) tacked on 0.14%.

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March 18, 2013

Performance for Week Ending 3/15/13:

The Dow Jones Industrial Average (Dow) rose 0.81%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.67%, the Standard & Poor's 500® Index (S&P 500) added 0.61% and the NASDAQ Composite Index (NASDAQ) tacked on 0.14%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Financials sector (+1.35%) led the way followed by Utilities (+1.19%) and Energy (+1.13%). The Telecom sector was the laggard, dropping 0.47%.

Index* Closing Price 3/15/2013 Percentage Change for Week Ending 3/15/2013 Year-to-Date Percentage Change Through 3/15/2013

Dow

14514.11

+0.81%

+10.76%

Wilshire 5000

16206.53

+0.67%

+9.80%

S&P 500

1560.70

+0.61%

+9.43%

NASDAQ

3249.07

+0.14%

+7.60%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 3/11/13 -3/15/13

The major market indices finished the week with modest gains. Despite the positive performance, trading seemed to take on a cautious tone as the week progressed, suggesting we may be on the cusp of entering into a period of “price discovery.”  With markets at or just off all time highs, investors are likely to begin assessing what has been discounted in stock prices and what is likely to come to fruition in the weeks/months ahead. This process could lead to a period of profit taking and/or make for choppy trading. With that said, downside risk is likely limited reflecting the recent pickup in the labor markets, resilient corporate profits, attractive valuation, investor friendly Federal Reserve (FED) policy and waning concerns over the turmoil in Europe.

While the outlook for the equity market remains constructive, we are also about one month away from entering into the seasonal period (“sell in May and go away”) that over the past three years has resulted in a pullback in the major market barometers. While the macro conditions appear to be in better shape currently than in past years, the high levels of complacency and building levels of bullishness (a contrarian indicator), suggest a “pause to refresh” may be coming. With that said, any pullback in the market would likely be corrective in nature and not the start of a major reversal in trend. I continue to be a believer that periodic pullbacks—which we have been generally devoid of as of late—are  healthy in the sense that they help keep expectations in check and weed out excesses that tend to get built into stock prices. I also believe that these consolidation periods generally allow for the digestion of gains and set the stage for the next phase higher – stay tuned.

There was much ado this past week surrounding the Dow’s ten consecutive day winning streak. According to Ned Davis Research, since 1900 there have been 40 other times when the Dow has closed higher for at least nine consecutive days. While follow through momentum over the next month was minimal (average gain of 0.12%), 12-months later the Dow was higher 68% of the time with an average gain of 6.79%.

The S&P 500 remains within a handful of points from exceeding its all time high of 1565 reached during October of 2007. Investors will look for the breach of that level as confirmation that the market’s recent run has extended to the broader market. According the WSJ Morning Market Beat newsletter, “The S&P constitutes a broader array of stocks than the Dow and is arguably a better representation of the economy. Perhaps most importantly, far more money tracks the S&P 500 than other benchmarks. The biggest exchange traded fund, for just one example–the SPDR S&P 500 ETF Trust–follows the S&P 500. Among Wall Street’s thousands of mutual funds, 1,361 mutual funds managing a total $2.75 trillion are benchmarked to the S&P 500, according to fund tracker Morningstar. By contrast, only six mutual funds are pegged to the Dow, representing just $142 million.”

Economic Roundup
Last week’s batch of economic data highlighted that the broader economy remains on firm footing and the labor markets continue to improve. On the jobs front, the Labor Department reported that initial jobless claims during the most recent period fell by 10K to 332K. Results were solidly better than the 350K expected by economists. The 4-week moving average—which helps smooth the week to week volatility—fell to 346.8K – the lowest since Feb 2008. The jobless claims data followed the prior week’s better than expected payroll report and ADP data. In addition, last week the Conference Board released their monthly Employment Trends Index (ETI), a compilation of 8 different employment barometers. The ETI rose for the fifth straight month and stands at its highest level since mid-2008. The index, which is structured to be forward looking, suggests faster job growth in the coming quarters.

An update on retail sales report also underscored the resiliency of the U.S. consumer. The Commerce Department reported that Retail Sales during the month of February rose 1.1%, solidly outpacing the 0.5% gain expected by economists. Sales excluding Autos rose by 1.0% also ahead of economists’ expectations. The gain in retail sales was the best in five months and likely reflects the improving job market and the “wealth effect” resulting from the gains in the equity and housing markets.

The retail sales data was followed by a report showing business inventories during the month of January expanded by a stronger than expected 1%, as companies’ replenished warehouses and store shelves amid signs demand is picking up. Following the release of the data, Barclays’s Research issued a report showing that GDP growth in the first quarter is now “tracking” at a 2.5% rate (vs. the current Bloomberg consensus estimate of 1.8%). In other words, based on the most recent data, economic growth could surprise to the upside.

The Week Ahead:
The focal point of the upcoming week will be the two day Federal Open Market Committee (FOMC) meeting scheduled for Tuesday and Wednesday. While no changes in policy are expected, investors will pay close attention to the tone of the after meeting communiqué and will parse every word looking for clues as to the duration of the FED’s bond buying initiatives. Housing data will dominate this week’s economic calendar with reports due out on housing starts, building permits, mortgage applications, and existing home sales. Other economic reports of interest include the leading indicators report and the Philadelphia FED manufacturing data.


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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