/perspectives/weekly-viewpoint/an-olympic-week-for-the-markets

An Olympic Week for the Markets

The Dow Jones Industrial Average (Dow) rose 2.28%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.42%, the Standard & Poor’s 500® Index (S&P 500) gained 2.32% and the NASDAQ Composite Index (NASDAQ) tacked on...

February 18, 2014    |    By Mike Schwager

Performance for Week Ending 2/14/14:

The Dow Jones Industrial Average (Dow) rose 2.28%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.42%, the Standard & Poor’s 500® Index (S&P 500) gained 2.32% and the NASDAQ Composite Index (NASDAQ) tacked on 2.86%. Sector breadth was positive as all 10 of the S&P sector groups finished higher. The Utilities sector (+3.33%) was the best performing sector followed by Healthcare (+3.28%) and Materials (+3.02%).

Index* Closing Price 2/14/2014 Percentage Change for Week Ending 2/14/2014 Year-to-Date Percentage Change Through 2/14/2014

Dow

16154.39

+2.28%

-2.55%

Wilshire 5000

19189.43

+2.42%

-0.34%

S&P 500

1838.63

+2.32%

-0.53%

NASDAQ

4244.03

+2.86%

+1.61%

*See below for Index Definitions
 

MARKET OBSERVATIONS 2/10/14 - 2/14/14

The major market indices finished the week solidly higher following upbeat comments from Federal Reserve (Fed) Chairman Janet Yellen, signs of a pickup in economic growth in Europe, and fading fears of Emerging Market contagion. Adding to the positive tone was the passage of a plan to extend the debt ceiling until March 15, 2015. 

Yellen Helps Stop the Sellin’
The focal point of the past week was Fed Chairman Janet Yellen’s testimony to the Congress. Yellen’s testimony was well received by investors as she remained confident in the underlying vigor of the U.S. economic recovery. Yellen reiterated that the Fed will continue scaling back its quantitative easing (QE) program as the economy strengthens. Investors have come to view this tapering process as confirmation that the economic environment continues to strengthen. Yellen also stressed that the labor market recovery is ‘far from complete’ (a hint that the Fed will take their time), QE is not on a preset course, and global market volatility is not a substantial risk to the U.S. economy. The Fed Chairman also stated that asset prices are not at worrisome levels, "our ability to detect bubbles is not perfect, but looking at a range of traditional valuation measures doesn't suggest that asset prices broadly speaking are in a bubble territory."

The Week Ahead
The economic calendar will take center stage during the upcoming holiday shortened week. Reports of interest include the February Empire State Manufacturing Survey, the February National Association of Home Builders Housing Market Index, January housing starts and building permits, the January Producer Price Index (PPI), the January Consumer Price Index (CPI), the February Philadelphia Fed Manufacturing Survey, and January existing home sales. Also of interest will be Wednesday’s release of the meeting minutes from the January Federal Open Market Committee meeting. On the earnings front, approximately 40 members of the S&P 500® index are scheduled to report earnings. Included in this group are Dow components Coca-Cola and Wal-Mart Stores.   A handful of Fed Heads will be out and about during the week. On Wednesday Atlanta Fed President Dennis Lockhart will speak on the economic outlook followed by a mid-day update from St. Louis Fed President James Bullard in Washington.  Also on Wednesday evening San Francisco president John Williams will give an update on the economic outlook and monetary policy at NYU. On Friday, James Bullard of the St. Louis Fed will speak at a forum in St. Louis.

MARKET VIEW:
Despite a rocky start for the U.S. markets, I continue to believe they remain poised to move higher during the course of the year, although the pace of gains is likely to be more muted relative to 2013. While setbacks could occur along the way, the stage appears set for the market to deliver solid performance reflecting a combination of multiple expansion and corporate profit growth, as well as an expected increase in equity portfolio flows.

The U.S. economy is expected to continue to gain traction, reflecting the ongoing gradual recovery in the housing sector, falling energy prices and reduced fiscal headwinds. While consensus expectations are for near 3% GDP growth in 2014, the risk appears to be skewed to the upside. Pent-up demand resulting from the huge gap in household formation over the prior several years should continue to buoy the housing market. The sector may also benefit from the rising cost of renting and the still-attractive level of mortgage rates. Gradual loosening of lending standards could also become a tailwind. A pickup in global demand would bode well for the U.S. manufacturing sector. While the sector has been shrinking since the mid-1960s and currently accounts for only about 12% of U.S. GDP, it is well positioned to expand as a result of lower operating costs due to improvements in productivity, new investments and declining energy and commodity prices. In addition, U.S. corporations are bringing jobs back home as rising overseas labor costs, a more competitive U.S. labor force and the expense of shipping have all diminished the economic benefits of outsourcing. The consumer segment of the economy should continue to benefit from an increase in net worth resulting from the rebound in housing and asset prices. This increase in “wealth” has recently boosted retail sales and consumer sentiment measures, suggesting consumers could continue to ramp up their consumption during 2014.

While the outlook for the domestic markets remains favorable, attractive relative valuation and improving macro conditions should set the stage for even higher returns out of the Eurozone. European risk assets should also benefit from reduced fiscal headwinds, supportive monetary policy and an uptick in economic growth. With the prospect of better economic growth, the diminishing threat of a Eurozone debt crisis, and the investor-friendly European Central Bank, patient investors are likely to be rewarded over the coming years.

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.

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.

NAHB/Wells Fargo Housing Market Index 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.

Producer Price Index – PPI is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

Consumer Price Index – CPI 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.

Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.



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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