All Eyes on Yellen
The major market indices finished the week lower as the cauldron of uncertainty continues to simmer.
February 08, 2016
| By Mike Schwager
Performance for Week Ending 2/5/2016:
The Dow Jones Industrial Average (Dow) fell 1.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 3.27%, the Standard & Poor’s 500 Index (S&P 500) dipped 3.10% and the Nasdaq Composite Index (NASDAQ) shed 5.44%. Sector breadth was negative with 7 of the 10 S&P sector groups finishing lower. The Consumer Discretionary sector (-5.43%) led the way lower followed by Technology (-5.37%) and Financials (-3.67%).
||Closing Price 2/5/2016
||Percentage Change for Week Ending 2/5/2016
||Year-to-Date Percentage Change Through 2/5/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 2/1/16 – 2/5/16
The major market indices finished the week lower as the cauldron of uncertainty continues to simmer. Weighing on the markets was growing concerns over the pace of global economic growth, how the decline in oil prices may impact the banking sector, uncertainty over the pace and path of US monetary policy, and fears about the durability of the US economic expansion.
Monthly Payroll Report:
On Friday, the Labor Department reported that January non-farm payrolls rose by only 151K, well below the 190K expected by economists. Despite the shortfall, the “guts” of the report were generally good. The unemployment rate fell to 4.9% from 5.0%, the lowest level in over eight years. The average workweek expanded and average hourly earnings grew by a better than expected 0.5% during the month and are now up 2.5% on a year-over-year basis. The lower unemployment rate and uptick in wages suggests that the labor markets are beginning to tighten, which in turn could begin to nudge overall inflation higher.
Being a believer that the reaction to the news is always more telling than the actual news, the market sell-off following the payroll release was notable. While on the surface it seemed easy to blame the market weakness on the lower than expected non-farm payroll number. However, the true reason for the weakness may have been the reports impact on future monetary policy. Over the past few weeks investors have been lowering their expectations around the path higher, with some indicators even suggesting the Fed will not raise rates or even lower them this year. However, Friday’s action in the dollar and two-year yields, both of which are very sensitive to policy changes, suggested otherwise. While four rate hikes, as indicated by the December Summary of Economic Projections seems like a stretch, based on the growth in wages and the drop in unemployment doing nothing also seems like a low probability outcome.
During the coming week Fed Chair Yellen will make her twice yearly trek to Capitol Hill to testify before Congress. This will be Yellen’s first public appearance since the December FOMC meeting when the Fed commenced lift-off. Yellen’s testimony will watched very closely for her thoughts on the recent turmoil in the global markets, the impact of the stronger dollar, and ultimately clues into the timing and the pace of future monetary actions. While Yellen will likely take a balanced approach and continue to stress data dependency, if her comments do take on a “hawkish” tone, the market will likely be rattled.
Q4 Earnings Round-up:
According to Bloomberg, through Friday 314 members of the S&P 500 have reported results with 72.3% surprising to the upside. Reported earnings for the S&P are currently down 4.5% but are still tracking solidly better than the 7% decline expected at the start of reporting season. Analysts have modestly revised their expectations higher and now expect S&P 500 earnings to finish the quarter down 4.5%. As has been the case over the past few quarters, the Energy sector remains the biggest drag. When looking at expectations excluding the Energy sector, overall results are forecast to rise by 1.8%.
The Week Ahead:
The focal point of the upcoming week will be Fed Chair Yellen’s semiannual monetary policy testimony to the House Financial Services committee on Wednesday and to the Senate Banking committee on Thursday. Earnings will remain in focus as 65 members of the S&P 500 are scheduled to release their results. Included in this group are Dow members Coca-Cola, Walt Disney, and Cisco Systems. The data calendar will be relatively light with Friday release of monthly retail sales being the highlight. Other reports of interest include the University of Michigan’s consumer sentiment survey and the December business inventories report.
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.
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 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.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
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