/perspectives/weekly-viewpoint/are-yellow-flags-starting-to-wave

Are Yellow Flags Starting to Wave?

Stocks finished the week mixed reflecting selling pressure in the technology sector, some underwhelming economic data, and “hawkish” commentary from the Federal Reserve.

June 19, 2017    |    By Mike Schwager

Performance for Week Ending 6/16/2017:

The Dow Jones Industrial Average (Dow) gained 0.53%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) dipped 0.11%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.06% and the Nasdaq Composite Index (NASDAQ) shed 0.90%. Sector performance was positive with 7 of the 11 S&P sector groups finishing higher. The Industrial (+1.64%) sector posted the best gain while Technology (-1.16%) posted the worst.

Index* Closing Price 6/16/2017 Percentage Change for Week Ending 6/16/2017 Year-to-Date Percentage Change Through 6/16/2017
Dow 21384.28 +0.53% +8.21%
Wilshire 5000 25266.61 -0.11% +7.86%
S&P 500 2433.15 +0.06% +8.68%
NASDAQ 6151.76 -0.90% +14.28%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 6/12/2017 – 6/16/2017

Stocks finished the week mixed reflecting selling pressure in the technology sector, some underwhelming economic data, and “hawkish” commentary from the Federal Reserve. Investors are also trying to decode the message being sent by the retreat in bond yields and slumping oil prices, both of which generally hint at rising concerns over forward growth. However, on the flipside, the equity markets have been very resilient, the new orders component—which tend to be forward looking—of various regional and national manufacturing surveys are expanding, and cyclical sectors of the market have been acting better. First quarter earnings were also the strongest in five years and consensus expectations for full year earnings in both 2017 and 2018 are estimated to grow by 12% and 11%, respectively.

The conflicting messages being broadcast from the different corners of the markets and economy are likely to keep investors close to the sidelines until a clearer picture emerges. We are also entering into the seasonally weak period for the market and it wouldn’t be surprising to see a bout of consolidation develop. If the market were to stage a pullback in the coming weeks/months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

FOMC Meeting: As widely expected, the Federal Open Market Committee (FOMC) raised its policy rate target by 25 basis points, to a range of 1.00% - 1.25%. The committee also indicated that they still expect to hike rates once more in the second half of this year, even with the recent weakness in core inflation. The central bank also laid out plans for shrinking its $4.5 trillion balance sheet, although they did not indicate when the program would begin other than "this year." When the balance sheet reduction begins the process will be very gradual and will likely to take several years before returning to more normal levels.

Mixed Bag of Economic Data: Last week’s batch of economic data was mixed, although there was nothing so dire to change the narrative of an expanding economy. On the employment front, the Labor Department reported that initial jobless claims during the week ended June 10 fell 8k to 237K. The four week moving average—which helps smooth the week-to-week volatility—rose to 243K but remains near the lowest levels in over 4-decades. Regional manufacturing activity remained in good shape with expansion seen in both the New York and Philadelphia regions. On the consumer side, the Commerce Department reported that retail sales during May dipped 0.3%, the most since January. Excluding Autos, sales fell 0.3%, the first decline since last August. Readings on consumer inflation also showed some moderation with the May Consumer Price Index dropping to 1.9% from 2.2% last month, marking the third straight decline. The “core” rate, which excludes food and energy, fell to 1.7 % from 1.9% in April.

The Week Ahead: The housing market will be the focal point of the data calendar with reports due out on both existing and new home sales during the month of May. Other reports of interest include initial jobless claims, the leading economic indicators index, and the Markit manufacturing and services indices. The Fed speaking calendar will be busy with at least nine Fed heads scheduled to make appearances including Vice Chairman Fischer on Tuesday. On the earnings front, eight members of the S&P 500 are scheduled to report quarterly results.

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.

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.


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