/perspectives/weekly-viewpoint/all-eyes-on-the-fomc-meeting

All Eyes on the FOMC Meeting

The Dow Jones Industrial Average (Dow) added 3.04%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.04%, the Standard & Poor’s 500® Index (S&P 500) rose 1.98% and the NASDAQ Composite Index (NASDAQ) tacked on ...

September 16, 2013    |    By Mike Schwager

Performance for Week Ending 9/13/13:

The Dow Jones Industrial Average (Dow) added 3.04%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.04%, the Standard & Poor’s 500® Index (S&P 500) rose 1.98% and the NASDAQ Composite Index (NASDAQ) tacked on 1.70%. Sector breadth was positive as all 10 of the S&P sector groups finished higher. The Industrials sector (+2.95%) led the way higher followed by Consumer Discretionary (+2.69%) and Materials (+2.68%). 

Index* Closing Price 9/13/2013 Percentage Change for Week Ending 9/13/2013 Year-to-Date Percentage Change Through 9/13/2013

Dow

15376.06

+3.04%

+17.34%

Wilshire 5000

17586.12

+2.04%

+19.15%

S&P 500

1687.99

+1.98%

+18.36%

NASDAQ

3722.18

+1.70%

+23.27%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 9/9/13 - 9/13/13

The major market indices finished the week solidly higher following a batch of better U.S. economic data, fading geopolitical concerns and signs both the Chinese and Eurozone economies are gaining tractions. Despite the gains in the headlines indices, trading was generally lackluster as many investors appeared tethered to the sidelines ahead of this week’s much anticipated Federal Open Market Committee (FOMC) meeting.

The FOMC meeting will take center stage this week reflecting the growing likelihood that the committee will introduce a plan to reduce their current bond buying initiative.  Consensus expectations are for the Federal Reserve (FED) to lower their monthly bond buying by $10 to $15 billion to a rate of $70 - $75 billion per month. The FED’s decision to taper has been well telegraphed to the marketplace; however it still remains a source of uncertainty. According to a recent Wall Street Journal poll, a majority of economists (66%) expect the FED to act at this week’s meeting, while a third expect no action. This would suggest not all investors are currently positioned for a change in policy. In addition, the FED is also likely to lower their forward growth outlook, leading to confusion as to why they are tapering in the first place. The FED has essentially painted themselves into a corner and if they fail to “stick the landing” by inadequately communicating their thought process and forward intentions at the conclusion of the meeting, it could result in increased market uncertainty and risk tarnishing the FED’s credibility.

Sentiment/Complacency on the Rise
Monitoring the level of bullish and bearish sentiment in the marketplace tends to be a useful barometer to gauge the mood of investors. Sentiment also tends to be a contrarian indicator. In other words, investors are typically the most bullish at or near market peaks and the most bearish at or near market troughs. This week the American Association of Individual Investors (AAII) reported that bullish sentiment in the most recent period jumped to 45.5% from 35.5%. The ten percentage point increase left bullish sentiment at the highest reading in eight weeks. The latest reading also moved sentiment back above its 20 year average of 40% for the first time since late-July but it still remains below “extreme” readings of 50%-plus that have often foreshadowed a short term market pullback. 

While the spring back in sentiment, in light of the recent market gains is not surprising, it is also occurring at a time when the CBOE Volatility Index (aka the fear index) is nearing its recent lows. The lack of fear and rising sentiment, suggest that investors may not be positioned for news flow that goes against the bullish grain, which in turn could result in investors heading for the exits in the case of an adverse event.

As mentioned last week, the polarization in Washington comes at a time when clarity on some major issues is needed. These include a decision around the budget ceiling, the appointment of a new Federal Reserve Chairman, and the tense and uncertain geopolitical environment. Couple in elevated energy prices and rising interest rates and things could get messy in a hurry – never a good thing from an investment point of view.

The Stock Trader’s Almanac points out that September has historically been the worst month of the year for stock market performance. So far the month of September is “bucking the trend” with the S&P positing a 3.37% positive return. However, with the S&P  up better than 18% year to date and uncertainty levels elevated, it’s not necessarily how you start the month but how you finish it – stay tuned.

The Week Ahead
The focal point of the upcoming week will be the two day (FOMC) meeting, starting on Tuesday. Following the conclusion of the meeting on Wednesday FED Chairman Bernanke will host a press conference at 2:30 p.m. ET. It is widely expected that the FOMC will introduce a plan to start tapering their bond buying program and introduce new forward guidance. The economic calendar will also be in focus with the key releases being the September Empire State manufacturing survey, August industrial production, the August Consumer Price Index (CPI), the National Association of Home Builders September housing market index, August housing starts and building permits, August existing home sales, and the September Philadelphia Fed Survey. Three Federal Reserve officials— Kansas City President George, St. Louis President Bullard and Minneapolis President  Kocherlakota—are scheduled to speak at the tail end of the week and will likely try to provide further clarity on the FED’s future intentions.


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.

VIX- CBOE Volatility Index is the ticker symbol for the Chicago Board Options Exchange (CBOE) Volatility Index, which shows the market's expectation of 30-day volatility. It is constructed using the implied volatilities of a wide range of S&P 500 index options. This volatility is meant to be forward looking and is calculated from both calls and puts. The VIX is a widely used measure of market risk and is often referred to as the "investor fear gauge."

NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.

Consumer Price Index is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

National Association of Home Builders is an index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.


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.

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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