/perspectives/weekly-viewpoint/bull-market-intact-but-a-pause-to-refresh”-may-be

Bull Market Intact but a “Pause to Refresh” May Be Coming

The major market indices finished the week little changed although the S&P 500 managed to squeak out its seventh consecutive weekly advance.

February 19, 2013

Performance for Week Ending 2/15/13:

The Dow Jones Industrial Average (Dow) fell 0.08%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.18%, the Standard & Poor's 500® Index (S&P 500) gained 0.12% and the NASDAQ Composite Index (NASDAQ) shed 0.06%. Sector breadth was neutral as 5 of the S&P sector groups finished higher while 5 finished lower. The Industrials sector (+1.1%) was the best performing sector while the Telecom sector (-1.46%) was the worst.

Index* Closing Price 2/15/2013 Percentage Change for Week Ending 2/15/2013 Year-to-Date Percentage Change Through 2/15/2013

Dow

13981.76

-0.08%

+6.70%

Wilshire 5000

15779.87

+0.18%

+6.91%

S&P 500

1519.79

+0.12%

+6.56%

NASDAQ

3192.03

-0.06%

+5.71%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 2/11/13 - 2/15/13

The major market indices finished the week little changed although the S&P 500 managed to squeak out its seventh consecutive weekly advance. The strong start to the year reflects growing confidence that the U.S. economy is on sustainable path of growth and the worst case scenario in the global markets has been taken off the table. Adding to the positive tone in the U.S. is the markets attractive valuation, the supportive policies of the Federal Reserve (FED) and growing corporate profits.

Confidence is also being underscored by the recent uptick in merger and acquisitions. According to the Wall Street Journal, corporate deal making since the start of the year has reached $160 billion, the strongest start since 2005. The surge in deals is being viewed as a confirmation that despite the gains in the markets over the past couple years, stocks still offer good value. In fact the S&P 500 sells for only 13.6x forward four quarter earnings, well below the 15.8 multiple reached when the market was at similar levels in 2007 and significantly below the 26 multiple seen ahead of the 2000 market top.

Despite the solid upward trajectory, the markets may be a little ahead of themselves in the near-term and could potentially face some rough sledding in the weeks ahead due to political uncertainty in Washington. While the so called fiscal cliff has been avoided, policymakers now face a March 1 deadline when $1.2 trillion (over 10 years) in spending cuts are set to take effect. According to the Congressional Budget Office,  a full sequester implementation would trim economic growth by an estimated 0.7% this year, while the Bipartisan Policy Institute predicts it would cost the nation 1 million jobs. Chris Krueger of the Guggenheim Washington Research Group opines that Congress is very likely to miss the March 1 deadline and some version of sequester will begin. Krueger however feels that some sort of agreement (a “punt” or “pass”) will likely be cobbled together by the end of March, which should ultimately soften the economic blow.

The U.S. economy and markets have exhibited incredible resiliency over the past several years even in the face of a credit rating downgrade, the lead up to the fiscal cliff negotiations and the perennial worries over a double dip recession. Importantly, none of these events knocked the recovery or the markets off kilter, which suggests that the sequester will not either, as the fundamentals of the U.S. economy remain strong enough to power through any fiscal contraction.

With the S&P up better than 6.5% since the start of the year and some key events (payrolls, FED meeting, SOTU address) now behind us, the market may be poised to enter into a period of “price discovery” as investors try to gauge what has been discounted into the market and what is likely to come to fruition in the weeks ahead. With that said, downside risk is likely limited (5ish percent) as performance anxiety amongst institutional investors will likely continue to foster a “buy the dip” mentality.

Economic Roundup
While the economic calendar was relatively light, the reported data signaled that the economic recovery continues to move forward (albeit at a modest pace). On the consumer front, the Commerce Department reported that Retail Sales during the month of January rose 0.1%, on target with analysts’ expectations. Sales excluding Autos rose by 0.2% slightly better than the 0.1% gain expected by economists. Retail Sales data over the next couple of months will be watched very closely as the data will likely shed light on whether the payroll tax increase is creating a headwind for the economic recovery – so far, so good – as consumers appear to be powering through the tax hike. This was also evident in the University of Michigan consumer confidence report which rose to a three month high in February. The uptick in confidence appears to be a reflection of firming home prices, improving labor conditions and the rising “wealth effect” associated with the stock market rally. On the jobs front, the Labor Department reported that initial jobless claims during the week ended February 9 fell by 27K to 341K, solidly better than the 360K expected by economists. Continuing claims– the ongoing number of people collecting unemployment benefits – fell 130K to 3114K – the lowest since July 2008.

Regional manufacturing data is also starting to show some improvement.  Last week the New York FED reported that manufacturing activity in the greater New York region unexpectedly expanded during the month of February. The NY Empire Index rose to 10.0 from negative 7.78 in January, well ahead of the negative 2.00 reading expected by economists. The data marked the first expansionary reading (readings above zero signal expansion) in seven months suggesting that manufacturing activity is beginning to gain traction. In addition to the better headline number the “guts” of the report were also encouraging with new orders, shipments and the employment component all showing solid gains.

Earnings Season
Fourth quarter earning season continue to wind down with the majority of companies reporting better than expected results. Through Friday, 395 members of the S &P 500 have reported fourth quarter earnings with overall results up by 9.2% (note: coming into the quarter expectations were for a 2.5% growth rate). Of the 395 companies, almost 69% have beaten expectations while just under 22% have fallen short. The current “beat” rate remains solidly ahead of the 61% long-term average.

The Week Ahead:
Data flow picks up in the holiday shortened week with the emphasis on the housing sector. This week will bring reports on housing starts, building permits, existing home sales and home builder sentiment. Other economic reports of interest include the consumer price index, the leading economic indicators index and the Philadelphia FED manufacturing data. With almost 80% of the S&P 500 companies having already reported their results, the earnings calendar will start to move to the backburner. This week 50 companies are scheduled to report including Dow-components Wal-Mart and Hewlett-Packard. News flow out of Washington is likely to be quiet as Congress is on break this week.  FED Heads will be out and about with five speeches on the docket.


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.

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.

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.


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