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





Wilshire 5000




S&P 500








*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. 

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.


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.

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