As January Goes, so Goes the Year?
The Dow Jones Industrial Average (Dow) rose 0.82%, the Wilshire 5000 Total Market Index,SM (Wilshire 5000SM) added 0.65%, the Standard & Poor’s 500 Index (S&P 500) gained 0.68% and the NASDAQ Composite Index (NASDAQ) tacked on 0.93%. Sector breadth was positive as ...
February 04, 2013
| By Mike Schwager
Performance for Week Ending 2/1/13:
The Dow Jones Industrial Average (Dow) rose 0.82%, the Wilshire 5000 Total Market Index,SM (Wilshire 5000SM) added 0.65%, the Standard & Poor’s 500® Index (S&P 500) gained 0.68% and the NASDAQ Composite Index (NASDAQ) tacked on 0.93%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Telecom sector (+3.61%) was the best performing sector while Consumer Discretionary (-0.93%) was the worst.
||Closing Price 2/1/2013
||Percentage Change for Week Ending 2/1/2013
||Year-to-Date Percentage Change Through 2/1/2013
*See below for Index Definitions
MARKET OBSERVATIONS: 1/28/13 - 2/1/13
The major market indices finished the week higher as upbeat reports on the labor market and manufacturing sector outweighed a report showing economic growth came to a screeching halt in the fourth quarter. The reaction to the economic data was encouraging in the sense that investors appear to be moving past the political noise in Washington and increasing their focus on the macro environment.
While it’s still too early to give an all clear sign, the macro trend, in my opinion, continues to point to better times ahead. With that said nothing ever moves in a straight line and arguably the markets have digested a fair amount of good news over the past several weeks. With the bulk of fourth quarter reporting season and the monthly payroll data now behind us, I wouldn’t be surprised to see the markets morph into a period of “price discovery” where investors try to gauge what has been discounted in the markets and what is likely to come to fruition in the weeks and months ahead.
With sentiment readings at elevated levels (a contrarian indicator), the market in “overbought” territory and fear in the market place—as measured by the Chicago Board Options Exchange Volatility Index (VIX) —near multiyear lows, the market has arguably become “priced for perfection.” This scenario, in my opinion, raises the odds that data points or news flow that go against the “bullish grain” could send investors heading for the exits. I continue to believe that a “pause to refresh” may be upon us and that periodic pullbacks—which we have been generally devoid of as of late—are healthy in the sense that they help keep expectations in check and weed out excesses that tend to get built into stock prices. These periods of consolidation allow for the digestion of gains and ultimately set the stage for the next leg higher. In other words if and when a setback in the market occurs; I would view it as an opportunity for longer-term investors to scale into the market.
Seasonals: "As January Goes, So Goes the Year"
The performance during the month of January is watched very closely as it has often been a precursor to full year performance. According to the Stock Trader’s Almanac, since 1950 January performance has predicted full year performance 89% of the time. The S&P finished the month up 5% the best start since 1997– stay tuned!
On Friday the Labor Department reported that nonfarm payrolls expanded by 157K during the month of January. The unemployment rate inched up to 7.9% (from 7.8%) while private payrolls—which filter out government hiring/firing—rose by 166K. Both the nonfarm payroll figures for November and December data were also revised sharply higher suggesting that labor markets were able to make headway despite the ongoing quarrelling in Washington.
While the labor market continues to add jobs, the pace of growth remains close to the average gain (+147K) experienced since the start of 2010. The market however seemed to like the “not too hot, not too cold” results as the report underscored that the labor markets are growing, albeit not at a rate that would cause the FED to prematurely raise interest rates.
As expected, the two day Federal Open Market Committee (FOMC) meeting concluded with no change to monetary policy. The after meeting communiqué noted that economic activity had "paused in recent months," largely because of weather and temporary factors. FED officials said they expect growth would continue at a "moderate pace" and that the jobs market would improve. The policy committee also said it would continue purchasing $85 billion each month of long-term Treasuries and mortgage-backed securities. All-in-all the meeting was viewed as a non-event.
Last week’s batch of economic data sent a mixed message with some data points suggesting continued growth while others suggested the economy may have hit a near-term speed bump. The latter was most evident in the preliminary release of the fourth quarter gross domestic product (GDP) report. While the GDP’s dip into negative territory (-0.1%) was surprising, the fact that the report was weak was not. Expectations heading into the report were muted reflecting the fiscal uncertainty during the quarter and the unknown impact of how Hurricane Sandy would affect overall results. It turned out that the bulk of the weakness during the quarter was centered on two components –inventories and government defense spending—both of which were weak and likely impacted by the fiscal issues during the quarter. The reaction to the report was somewhat muted as it appears that investors are currently willing to give economic reports that are impacted by the “fiscal cliff” a free pass as these headwinds are likely to prove fleeting. The report wasn’t all bad news as personal consumption grew 2.2% during the quarter and fixed investment expanded by 9.7%.
On the positive side of the ledger, the gains in the labor market were very encouraging as was the uptick in the Institute for Supply Management (ISM) Manufacturing Index. Last week the ISM reported that manufacturing during the month of January expanded at the best pace in 9 months. In addition to the headline number, the “guts” of the report were also encouraging with the production, employment, and new orders components all showing solid gains. Not only is the U.S. showing solid progress in the manufacturing arena, but as indicated by the JP Morgan Global Manufacturing Index, global manufacturing started the New Year at a 10-month high after posting a second consecutive month of expansion during the month of January.
Fourth quarter earnings reports continue to trend solidly above the reduced level of expectations that we saw heading into the quarter. Through Friday, 255 members of the S &P 500 have reported fourth quarter earnings with overall results up by 10.1% (note: coming into the quarter expectations were for a 2.5% growth rate). Of the 255 companies, 67.5% have beaten expectations while 21.6% have fallen short. The current “beat” rate remains solidly ahead of the 61% long-term average.
The Week Ahead:
Data flow will be considerably lighter during the upcoming week. The focal point of the economic calendar will be Tuesday’s ISM nonmanufacturing report and Thursday’s release of initial jobless claims. The earnings calendar will remain relatively busy with 90 members of the S&P scheduled to report their quarterly results. One other event of interest will be Thursday’s meeting of the European Central Bank (ECB). While policymakers are not expected to make any changes, ECB President Mario Draghi will likely address the current state of the Eurozone economy.
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.
The Chicago Board Options Exchange Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
Institute for Supply Management (ISM) Manufacturing and Non-Manufacturing Indices: The Manufacturing Index Index is a monthly composite index that is based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area. The index is released on the first business day of the month and covers the previous month’s data, which makes it particularly timely. If the index is above 50, it indicates that the economy is expanding. Values below 50 indicate a contraction.
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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