/perspectives/weekly-viewpoint/are-investors-climbing-a-rope-of-hope

Are Investors Climbing a Rope of Hope?

...

September 09, 2013    |    By Mike Schwager

Performance for Week Ending 9/6/13:

The Dow Jones Industrial Average (Dow) added 0.76%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.42%, the Standard & Poor’s 500® Index (S&P 500) rose 1.36% and the NASDAQ Composite Index (NASDAQ) tacked on 1.95%. Sector breadth was positive as 8 of the10 S&P sector groups finished higher. The Healthcare sector (+1.89%) led the way higher followed by Financials (+1.8%) and Industrials (+1.68%). 

Index* Closing Price 9/6/2013 Percentage Change for Week Ending 9/6/2013 Year-to-Date Percentage Change Through 9/6/2013

Dow

14922.50

+0.76%

+13.88%

Wilshire 5000

17234.07

+1.42%

+16.77%

S&P 500

1655.17

+1.36%

+16.06%

NASDAQ

3660.01

+1.95%

+21.21%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 9/2/13 - 9/6/13

The major market indices finished the week solidly higher as investors digested mostly favorable economic data, the likelihood of reduced bond buying activity from the Federal Reserve (FED) and the potential fallout from geopolitical tensions in Syria.

In my travels to visit clients over the past year, a question that is almost always asked is “what’s the biggest risk?” My answer has consistently been: Washington. The polarization in Washington and the vitriol between parties has resulted in gridlock with policy decisions at a near standstill. When you add into the mix the upcoming budget ceiling debate, the indecision over who should be appointed as the new FED chairman, the pending vote over whether to employ a military strike in Syria, and the curtailing of monetary stimulus, among others – things have the potential to get messy in a hurry.  This is especially true when you factor in the rise in energy prices and the back up in interest rates/mortgage rates. If anything, a crisis in confidence is likely to emerge – never a good thing from an investment point of view.

Interestingly, despite this “toxic” brew, traditional fear fulcrums remain generally complacent. While the CBOE Volatility Index (aka the fear index) has moved off its recent lows, it is far from being elevated and well off past “panic” extremes. In addition, traditional “safe-havens” like Gold and Treasuries have not really benefited much from the usual “flight to safety” trade that would typically occur with this much uncertainty.

What this tells me is that a bad outcome is not currently baked into the markets and it seems the investors are hoping for the best, while failing to prepare for the worst.  As boxer Mike Tyson once said “everyone has a plan until they get punched in the face.” Based on the laundry list pending of events, the question now becomes whether any of these will turn into a “hay-maker” -- stay tuned.

Payroll Report
In one of the most highly anticipated economic reports in quite some time, the Labor Department reported that nonfarm payrolls in August rose by 169K short of the 180K expected by economists. The unemployment rate dipped to 7.3% (from 7.4%) while Private Payrolls—which filter out government hiring/firing—rose by a disappointing 152K. Adding insult to injury, net revisions to prior months data subtracted 74k from payrolls, and the one-tenth decline in the unemployment rate, to 7.3%, was driven by a decline in the labor force participation, to 63.2% - the lowest since the late-seventies.

The report seemed to raise the question of whether the data is strong enough for the FED to start tapering at this month’s upcoming Federal Open Market Committee (FOMC) meeting. As mentioned in past updates, the FED has essentially backed itself into a corner and doing nothing really doesn’t seem to be an option. The market has started to become comfortable with tapering talk and backing off would likely send a strong signal that the economic recovery is losing traction. Arguably recent data has sent some mixed signals; however, the FED has repeatedly reminded us that their decision to cut back in stimulus is based on their forward outlook and not the current set of data points. It seems to me the FED really has only two options: the mostly likely being a smaller cut in bond buying (taper-lite) or the second option would be to delay any tapering initiatives until the December meeting. It will be interesting to hear what FED Heads have to say in coming days. 

Syria
While the decision to strike Syria was still pending as of this writing, the uncertainty surrounding this situation is likely to remain a near term headwind. While a strike on Syria, in and of itself, will have little economic impact, there is growing fear over the potential for so called “coat tail” risk. In other words, who else gets “dragged” into the mix (Iran, Russia) and will it lead to a much larger contagion in the Middle East? In addition, tension in this part of the world will likely result in higher oil prices. Elevated energy prices tend to act as a de facto tax on consumers – how will this impact U.S. economic growth?

In reviewing past military events since 1950, Ned Davis Research found that the market has historically been weak in the weeks heading into the event. Afterward, however the market has recouped the losses and went on to post average gains of 8.5% over the next six months. This is similar to work cited by Sam Stovall at S&P Capital IQ. Stovall looked out over the past 70 years and found events ranging from wars, near wars, assassinations, assassination attempts, terrorist attacks and financial collapses for clues on how to approach the current situation. Stovall found that in most cases stocks initially sold off, but then didn’t take long to bounce back and recover those rapid losses. In Stovall’s typical witty fashion he added that if/when a strike were to occur “it would probably be one of the most anticipated of unanticipated events in modern history.”

The Week Ahead
News flow surrounding Syria and the pending decision of whether the FED will begin to taper will likely be the focus during the upcoming week. The economic calendar is relatively light with most of the data coming on Thursday and Friday. Reports of interest include initial jobless claims, the August Producer Price Index (PPI) index, August retail sales, and the preliminary September University of Michigan consumer confidence index. The earnings calendar continues to fade with only one member of the S&P 500 scheduled to report results. Due to the traditional “black out” period ahead of FOMC meetings, there is one FED member scheduled to speak this week. On Monday, San Francisco FED President Williams will deliver the keynote speech at the National Association of Business Economics’ annual meeting. There will be a Q&A session, so Williams may give some insight into the FED’s current thinking on cutting their bond buying program.


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."

Producer Price Index 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.

Michigan Consumer Sentiment Index is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

 

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.


FEATURED PERSPECTIVES

January 24, 2019

Amber Lights Flash at Davos

Should the mood this year at Davos prove once again to be a contra-indicator, this may be the signal that the economy is likely to re-accelerate soon and that the party in risk assets continues.

January 18, 2019

Up the Escalator, Down the Elevator

An uptick in corporate defaults in 2019 will mark the beginning of a prolonged period of stress in the corporate bond market.

January 16, 2019

10 Macro Themes to Watch in 2019

Ten charts illustrate the macroeconomic trends most likely to shape Fed policy and investment performance in 2019 and beyond.


VIDEO

Forecating the Next Recession 

Forecating the Next Recession

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.”

Macro Themes to Watch in 2018 

Macro Themes to Watch in 2018

In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”







Read a prospectus and summary prospectus (if available) carefully before investing. It contains the investment objective, risks charges, expenses and the other information, which should be considered carefully before investing. To obtain a prospectus and summary prospectus (if available) click here or call 800.820.0888.

Investing involves risk, including the possible loss of principal.

Guggenheim Investments represents the investment management businesses of Guggenheim Partners, LLC ("Guggenheim"), which includes Security Investors, LLC ("SI"), Guggenheim Funds Investment Advisors, LLC, ("GFIA") and Guggenheim Partners Investment Management ("GPIM") the investment advisers to the referenced funds. Securities offered through Guggenheim Funds Distributors, LLC, an affiliate of Guggenheim, SI, GFIA and GPIM.

© Guggenheim Investments. All rights reserved.

Research our firm with FINRA Broker Check.

• Not FDIC Insured • No Bank Guarantee • May Lose Value

This website is directed to and intended for use by citizens or residents of the United States of America only. The material provided on this website is not intended as a recommendation or as investment advice of any kind, including in connection with rollovers, transfers, and distributions. Such material is not provided in a fiduciary capacity, may not be relied upon for or in connection with the making of investment decisions, and does not constitute a solicitation of an offer to buy or sell securities. All content has been provided for informational or educational purposes only and is not intended to be and should not be construed as legal or tax advice and/or a legal opinion. Always consult a financial, tax and/or legal professional regarding your specific situation. Investing involves risk, including the possible loss of principal.