/perspectives/weekly-viewpoint/a-pause-to-refresh

A Pause to Refresh?

Performance for Week Ending 8/24/12: The Dow Jones Industrial Average (Dow) fell 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.54%, the Standard & Poor's 500® Index (S&P 500) declined by 0.50% and the NASDAQ Composite Index (NASDAQ) shed 1.22%. Sector breadth was negative as ...

August 27, 2012    |    By Mike Schwager

Performance for Week Ending 8/24/12:

The Dow Jones Industrial Average (Dow) fell 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.54%, the Standard & Poor's 500® Index (S&P 500) declined by 0.50% and the NASDAQ Composite Index (NASDAQ) shed 1.22%. Sector breadth was negative as 8 of the 10 sector groups finished lower. The Healthcare sector (+0.62%) was the best performer, while the Utility sector (-1.35%) was the worst.

Index* Closing Price 8/24/2012 Percentage Change for Week Ending 8/24/2012 Year-to-Date Percentage Change Through 8/24/2012

Dow

13157.97

-0.88%

+7.70%

Wilshire 5000

14518.12

-0.54%

+11.73%

S&P 500

1411.13

-0.50%

+12.21%

NASDAQ

3069.79

-0.22%

+17.84%

*See Last Page for Index Definitions
 

MARKET OBSERVATIONS: 8/20/12 - 8/24/12

After six straight weeks of gains, the major market indices finished the week moderately lower. Worries over slowing global growth and renewed concerns over the viability of the Eurozone appeared to be the major driver behind the weakness.

After posting gains of over 10% since early June, investors may have also concluded that the market has gone too far, too fast while underestimating the degree of global economic slowing. The summer rally, for the most part, has been built on hopes of more monetary stimulus from global central banks. While policy initiatives are still very much on the table, this enthusiasm has been toned down a bit. The U.S. economy has been showing signs of strength and the European Central Bank (ECB) has hinted they are likely to wait until after Germany's Constitutional Court rules on the legality of the European Stability Mechanism (aka the bailout fund) before acting. The German ruling is set for September 12.

Also, between now and September 12, there are several very important events that all could have negative implications for the markets. Two U.S. events, in particular, that will be watched very closely include Fed Chairman Bernanke's speech at the Jackson Hole meeting (Aug. 31) and the U.S. Employment Report (Sept. 7).

FOMC Meeting Minutes
Last week, the minutes from the July 31/August 1 Federal Open Market Committee (FOMC) meeting were released. The minutes took on a very "dovish" tone and underscored an increased urgency to provide more help for the weak U.S. economy.  The minutes also showed many members of the committee felt further support would be needed "fairly soon" unless the economy significantly improved.

While the news should have been music to the ears of investors, the market's reaction was generally muted, suggesting that this outcome may have already been discounted into stock prices. In addition, there has been a growing chorus of economists suggesting that the recent rebound in economic activity will likely be a headwind to further easing initiatives. This was underscored by St. Louis Fed President James Bullard. Speaking on CNBC, Bullard said the minutes of the FOMC meeting were a "bit stale" and data since then has been somewhat stronger. Bullard also said that growth of around 2% in the second half of 2012 would be strong enough for the Fed to keep its monetary policy stance on hold. In other words, QE-3, in Bullard's view, is not a sure thing at the September FOMC meeting.

Almost on cue, and as if the Fed sensed growing doubt in the market place, a letter sent by Fed Chairman Bernanke to the House Oversight Committee Chairman, Darrell Issa, was highlighted by Jon Hilsenrath of the Wall Street Journal. Investors tend to pay attention to Hilsenrath as he is known to have a direct pipeline into the Fed and has been used in the past to "telegraph" the Fed's thinking. The letter defended the actions the Fed  has taken to support the economy and said "there is scope for further action by the Federal Reserve to ease financial conditions and strengthen the recovery."  Bernanke also said that "because monetary policy actions operate with a lag," the Fed must make policy "in light of a forecast of the future performance of the economy." The letter seemed to put monetary stimulus back into the limelight, although investors will ultimately look to Friday's Jackson Hole speech by Fed Chairman Bernanke for further confirmation.

Economic Round-up
Last week's batch of economic data confirmed that the economy continues to forge ahead (albeit at a very muted pace). On the housing front, the National Association of Realtors said existing home sales in July rose 2.3%, the first gain in three months. The existing home sales data was followed by an upbeat report on new home sales. The Commerce Department reported that new home sales climbed 3.6% in July, the third increase in the past four months. The combination of lower prices, pent-up demand and near record low mortgage rates appears to be the driving force behind the housing market's stabilization. On the labor front, the Labor Department reported that initial jobless claims, during the week ended, rose 4K to 372K. The 4-week moving average—which helps smooth the week to week volatility—rose to 368K, but remains well below the key 400K level.

The Week Ahead:
The focal point of the upcoming week will be Fed Chairman Bernanke's speech Friday morning at the Jackson Hole symposium. Bernanke is scheduled to speak at (10:00ET) with the title of his speech being "Monetary Policy since the Crisis."  As mentioned in past Viewpoints, the Jackson Hole meeting has been used in recent years by Fed Chairman Bernanke as a forum to frame up new monetary initiatives. This week's economic calendar contains several reports of interest including consumer confidence, the first revision to the second quarter GDP, personal income/spending, initial jobless claims, and pending home sales. Also of interest will be Wednesday's release of the Fed's Beige Book report and the ongoing news flow out of the Republican National Convention.

MARKET VIEWPOINT

I continue to believe that the U.S. equity markets remain well positioned for positive performance over the course of the next few quarters, especially relative to cash and safe-haven Treasury bonds. This upbeat view reflects the market's attractive valuation, the overall healthy nature of corporate balance sheets, the recovering (albeit modestly) economy, expectations that corporate profits will remain favorable, and the pledge from the Federal Reserve that monetary policy will remain accommodative through at least late-2014. In light of these favorable dynamics, I continue to believe that market weakness represents an attractive entry point, especially for longer-term investors.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


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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