Buyers Exhaustion Setting In
The major market indices finished the week lower as investors took profits following the recent run-up in prices. After a very weak start to the year, the S&P found a bottom on February 11 and has since rallied by nearly 12% through Fridays’ (4/8) close.
April 11, 2016
| By Mike Schwager
Performance for Week Ending 4/8/2016:
The Dow Jones Industrial Average (Dow) fell 1.21%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.24%, the Standard & Poor’s 500 Index (S&P 500) closed off 1.21% and the Nasdaq Composite Index (NASDAQ) shed 1.30%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Financials sector (-2.90%) led the way lower followed by Telecom (-2.33%) and Consumer Discretionary (-2.06%).
||Closing Price 4/8/2016
||Percentage Change for Week Ending 4/8/2016
||Year-to-Date Percentage Change Through 4/8/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 4/4/16 – 4/8/16
The major market indices finished the week lower as investors took profits following the recent run-up in prices. After a very weak start to the year, the S&P found a bottom on February 11 and has since rallied by nearly 12% through Fridays’ (4/8) close. The rally has reflected the rebound in oil prices, weakness in the US dollar, resilient economic data in the US economy, signs the US manufacturing sector is expanding again, and stabilization in most economies outside the US. Last week’s pullback was only the second weekly decline in the past eight weeks. After the run-up stocks seem to be going through a period of “price discovery” as investors try to gauge what is currently priced into the market and what is likely to come to fruition in the weeks/months ahead. As such, the markets may remain range-bound in the near term as lofty valuation levels and uncertainty heading into first quarter earnings season could keep investors tethered to the sidelines.
First quarter earnings season will begin in earnest during the coming week with 15 members of the S&P 500 scheduled to report. Expectations heading into the quarter are very low with overall S&P 500 earnings expected to decline by over 10%, according to Bloomberg data. Forward guidance will be watched very closely with a particular focus on how the recent action in oil and the dollar may impact future results.
FOMC Meeting Minutes: The meeting minutes from the March 15/16 Federal Open Market Committee (FOMC) meeting were modestly more ‘dovish’ than anticipated. The minutes highlighted that Federal Reserve officials were leaning against raising short-term interest rates at their April policy meeting when they gathered in March. The committee indicated that they expect headwinds to the economy to subside only slowly and didn't want to appear to be in a rush to push U.S. interest rates higher. According to the minutes, several participants "expressed the view that a cautious approach to raising rates would be prudent or noted their concern that raising the target range as soon as April would signal a sense of urgency they did not think appropriate." According to Bloomberg, the highest chance for a rate cut this year is at the December meeting where Traders are currently discounting only a 37% probability of a quarter point hike.
Economy: The data calendar was relatively light this past week, although reported data did have a positive bent. The ISM Non-Manufacturing (services) Index rose 1.1 points to 54.5 in March, above the consensus estimate of 54.2, and the first uptick in 5 months. The “guts” of the report were also solid with the forward looking new orders component rising to 56.7 and business activity jumping to 59.8 (note: readings above 50 signal expansion). Service oriented businesses (construction, retail, healthcare, etc.) account for 90% of the US economy. The forward looking components of the report suggest strength in the services sector should continue in the coming months. Elsewhere, the Mortgage Bankers Association reported that mortgage applications rose 2.7% during the week ended April 1, the first gain in 4 weeks. The uptick in applications reflected a 6.8% advance in the refinancing component which offset the 2.4% decline in the purchase index.
The Week Ahead: First-quarter earnings season will kick-off this week with Alcoa’s release on Monday afternoon. Joining it will be 14 other members of the S&P 500 members, including banking bellwethers JPMorgan Chase, Bank of America Corp., Wells Fargo, and Citigroup. The focus of this week’s economic calendar will be the release of monthly retail sales on Wednesday. Other data reports of note include the March Producer Price Index (PPI), February business inventories, the Fed’s periodic Beige Book report, the March Consumer Price Index (CPI), March industrial production and capacity utilization, the April Empire State manufacturing survey and the University of Michigan’s preliminary April consumer sentiment survey. Several Federal Reserve officials will make public appearances including Dallas president Rob Kaplan on Monday; Philadelphia president Patrick Harper, San Francisco president John Williams and Richmond president Jeffrey Lacker on Tuesday; Atlanta president Dennis Lockhart and Governor Jerome Powell on Thursday; and Chicago president Charles Evans on Friday.
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.
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Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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