/perspectives/weekly-viewpoint/bargain-hunters-step-into-the-fold

Bargain Hunters Step into the Fold

The Dow Jones Industrial Average (Dow) gained 2.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 4.06%, the Standard & Poor’s 500 Index® (S&P 500) finished up 4.12% and the NADAQ Composite Index (NASDAQ) tacked on 5.29%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Healthcare sector (+6.57%) led the way followed by Technology (+4.68%) and Industrials (+4.28%).

October 27, 2014    |    By Mike Schwager

Performance for Week Ending 10/24/2014:

The Dow Jones Industrial Average (Dow) gained 2.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 4.06%, the Standard & Poor’s 500 Index® (S&P 500) finished up 4.12% and the NADAQ Composite Index (NASDAQ) tacked on 5.29%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Healthcare sector (+6.57%) led the way followed by Technology (+4.68%) and Industrials (+4.28%).

Index* Closing Price 10/24/2014 Percentage Change for Week Ending 10/24/2014 Year-to-Date Percentage Change Through 10/24/2014

Dow

16805.41

+2.59%

+1.38%

Wilshire 5000

20287.04

+4.06%

+5.36%

S&P 500

1964.58

+4.12%

+6.29%

NASDAQ

4483.71

+5.29%

+7.35%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 10/20/2014-10/24/2014

The major market indices finished higher for the first time in five weeks as investors took advantage of the recent weakness to added equity exposure to their portfolios. The rally was widespread with almost every major global benchmark finishing up better than 1 percent. While there was no specific catalyst to propel the markets higher, the investor mindset seems to be shifting from fear back to fundamentals. Over the course of the week, global economic data was solid, including the closely watched Markit global manufacturing PMI’s, and seemed to suggest that global growth concerns that have plagued the market over the past several weeks may have become a bit overdone.

The small-cap Russell 2000 Index also showed signs of life, following the 13% correction since early July (the Russell has gained over 6% during the past two weeks). This is good news for the broader market, as the market is only as strong as it weakest link.  While investor sentiment still appears slightly bruised following the recent sell-off, the U.S. fundamental landscape remains sturdy. The economy remains poised to grow at approximately a 3% pace over the next few quarters, the labor markets continue to heal as suggested by the 14-year low in initial jobless claims and Q3 earnings are surprising to the upside.

Seasonals headwinds should also begin to morph into a tailwind in the coming weeks and corporate buyback activity should once again become a key driver of market performance. Most companies are precluded from engaging in open-market stock repurchases during earnings season. For many firms, the beginning of the blackout period coincided with the S&P 500 peak on September 18, so the sell-off was occurring during a time when the single largest source of equity demand was absent. In terms of timing, by the end of the coming week, more than 75% of S&P 500 constituents will have reported 3Q results and will be able to resume buybacks. Since 2007, an average of 25% of annual buybacks has occurred during the last two months of the year.

While the market appears to be stabilizing, volatility is expected to remain elevated reflecting growing concerns over the spread of Ebola, geopolitical issues, and uncertainty over the timing of Federal Reserve (Fed) rate hikes.

Earnings Season
Third quarter earnings season remained a bright spot last week. Through Friday, 207 members of the S&P 500 have reported quarterly results with overall earnings up by 7.5% (coming into earnings season, analysts were forecasting sub-5 percent growth).  Of the 207 companies, 70.5% have beaten expectations while 18% have fallen short. The current “beat” rate sits solidly above the long-term average of 63%. Analysts have been revising expectations higher over the past few weeks with overall S&P 500 earnings now expected to rise by 6.3% while revenues are forecast to expand by 4.1%.

The Week Ahead:
The key event in the upcoming week will be the two-day Federal Open Market Committee (FOMC) meeting. While the Fed is expected to announce the conclusion of its quantitative easing efforts, the focal point will be on the tone of the after meeting communiqué. The statement will likely take on a dovish tone reflecting recent concerns over global economic weakness and the impact of the strong dollar. The economic calendar will also be watched closely with the key reports being September durable goods orders, the Conference Board’s October consumer confidence survey, the initial estimate of third-quarter GDP, September personal income and spending, and the University of Michigan’s final October consumer sentiment index. This is the peak week for third quarter earnings reports with 160 members of the S&P 500 scheduled to release results during the week.


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.

Michigan Consumer Sentiment Index – MCSI 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.

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.

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 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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