Another Weak Week

Performance for Week Ending 9/28/12: The Dow Jones Industrial Average (Dow) fell 1.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.43%, the Standard & Poor's 500® Index (S&P 500) declined by 1.33% and the NASDAQ Composite Index (NASDAQ) shed 2.0%. Sector breadth was negative as ...

October 01, 2012    |    By Mike Schwager

Performance for Week Ending 9/28/12:

The Dow Jones Industrial Average (Dow) fell 1.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.43%, the Standard & Poor's 500® Index (S&P 500) declined by 1.33% and the NASDAQ Composite Index (NASDAQ) shed 2.0%. Sector breadth was negative as 9 of the 10 S&P sector groups finished lower. The Technology sector (-2.36%) was the worst performer while the Utility sector (+0.93%) was the best.

Index* Closing Price 9/28/12 Percentage Change for Week Ending 9/28/12 Year-to-Date Percentage Change Through 9/28/12





Wilshire 5000




S&P 500









*See Last Page for Index Definitions

MARKET OBSERVATIONS: 9/24/12 - 9/28/12

The major market indices finished lower for a second straight week on growing concern the U.S. economic recovery is losing momentum, increased worries over the state of Eurozone due to Spain's reluctance to ask for bail-out funding and rising fears Chinese policymakers are falling behind in their efforts to jumpstart their flagging economy. The recent weakness has left the S&P 500 Index lower in 8 of the past 10 sessions and has pushed the benchmark below levels just prior to the Federal Reserve's (FED's) announced bond buying program on September 13.

Also weighing on investor sentiment have been concerns over the potential for a hard landing in China. These fears were flamed last week when China's Shanghai Composite Index traded to the lowest level since early 2009 and threatened to test the closely watched 2000 support level. Historically, the Shanghai Index has been a leading indicator for China's GDP. The recent lows in the index may be signaling further deterioration in the Chinese economy.

In addition to global growth concerns, U.S. investors are wary over the looming fiscal cliff and concern the recently announced quantitative easing program will do little to jumpstart economic growth. This latter concern was underscored in a recent speech by Philadelphia Fed President Charles Plosser who opined that the FED's bond buying program probably won't boost economic growth or hiring and may jeopardize the FED's credibility.

Soft Patch?
Last week, the Commerce Department reported that the final revision to second quarter GDP showed the U.S. economy growing at a lackluster 1.3% pace. After growing 4.1% in the fourth quarter of last year and 2.0% in the first quarter, the number clearly suggests that the economy hit a soft patch in the second quarter. While the Q2 GDP data was clearly disappointing, it is also worth mentioning that GDP data is backward looking as it reflects economic conditions from the April to June period. Remember that markets tend to be forward looking, and therefore putting too much emphasis on dated economic statistics is like trying to drive a car by looking in your rear view mirror. With that said, a recent update from Barclay's Research suggested that third quarter GDP is currently tracking at a lackluster 1.8% pace. This "muddle along" growth not only seems to reflect the slowdown in economic growth in both Europe and Asia but a general reluctance by business and consumers to spend because of the uncertainty surrounding the elections and the looming fiscal cliff.

Strategas Research recently noted that, in general, 2% real GDP growth is the red line for corporate profit growth. With recent growth trending below that level and with several high profile earnings warnings over the past couple weeks, it is not surprising that analysts are forecasting a decline (-2.0%) in the third quarter earnings for the S&P 500. With that said, a potential silver lining is that with expectations are so low heading into earnings season, there now appears to be plenty of room for upside surprise.

Weakness Likely Temporary
While the hangover is never as fun as the party, I still believe it would be premature to put a toe-tag on the recent rally in risk assets. News flow and negative headline risk will continue to dictate trade in the near-term, however, with the markets addiction to monetary policy and the FED's commitment to keep delivering the "goods," downside risk will likely be limited. While market weakness can be very frustrating, we must also be cognizant of the fact that a lot of good news has been priced into the markets over the past few months and the recent "soft patch" in economic data and looming political and fiscal risks are causing investors to question what is discounted in the markets and what is likely to come to fruition.

These corrective phases are almost like a flu shot – while the shot itself is painful, it is a necessary evil before the healing process can begin. In other words, the consolidation process—while painful to go through—provides a mechanism to filter out the "weak holders" and "quick money guys" and allows shares to be repositioned to longer term investors at more attractive price points – stay tuned.

Q3 Review:
Last week marked the end of the third quarter. During the quarter the S&P 500 gained 5.76%, the Dow added 4.32%, and the NASDAQ Composite tacked on 6.17%. Commodities fared well with Gold (+10.99%), Oil (+8.31%) and Copper (+7.64) all posting solid performance. On the sector level, nine of the 10 S&P sector groups posted gains with Energy (+9.52%) leading the way followed by Consumer Discretionary (+7.07%) and Technology (+7.04%).  The Utility sector was the sole laggard, finishing off 1.55% during the quarter.

The Week Ahead:
The focal point of the upcoming week will be Friday’s Payroll report. According to Bloomberg, nonfarm payrolls are expected to expand by 115K while the unemployment rate is expected to rise to 8.2% from 8.1%. Private payrolls—which filter out government hiring/firing—are expected to rise by 130K. Other reports of interest will be the ISM manufacturing and non-manufacturing reports, construction spending, factory orders, and jobless claims.  Third quarter earnings will begin trickling out over the next couple weeks although the focus is likely to remain on forward earnings guidance from company management, with a particular focus on how slowing global growth is impacting business conditions. A handful of FED officials are scheduled to make speeches during the week highlighted by FED Chairman Bernanke who will speak in Indianapolis on Monday.


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 markets 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 FED that monetary policy will remain accommodative through at least mid-2015. In light of these favorable dynamics, I continue to believe that bouts of market weakness represent 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.


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.


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