/perspectives/weekly-viewpoint/deja-vu-all-over-again

Déjà Vu All Over Again?

The Dow Jones Industrial Average (Dow) fell 0.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.25%, the Standard & Poor's 500® Index (S&P 500) dipped 1.01% and the NASDAQ Composite Index (NASDAQ) finished off down 1.95%. Sector breadth was negative as 7...

April 08, 2013

Performance for Week Ending 4/5/13:

The Dow Jones Industrial Average (Dow) fell 0.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.25%, the Standard & Poor’s 500® Index (S&P 500) dipped 1.01% and the NASDAQ Composite Index (NASDAQ) finished off down 1.95%. Sector breadth was negative as 7 of the 10 S&P sector groups finished lower. The Technology sector (-2.49%) was the worst performer while the Telecom sector (+2.40%) was the best.

Index* Closing Price 4/5/2013 Percentage Change for Week Ending 4/5/2013 Year-to-Date Percentage Change Through 4/5/2013

Dow

14565.25

-0.09%

+11.15%

Wilshire 5000

16084.42

-1.25%

+8.98%

S&P 500

1553.28

-1.01%

+8.91%

NASDAQ

3203.86

-1.95%

+6.11%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 4/1/13 - 4/5/13

The major market indices finished the week lower on growth related concerns following a batch of weaker than expected economic reports and jitters ahead of the kick-off to first quarter earnings season. 

Payroll Report
On Friday the Labor Department reported that nonfarm payrolls rose by a very weak 88K (estimate: 190K). The unemployment  rate ticked lower 7.6% (from 7.7%) while private payrolls—which filter out government hiring/firing—rose by only 95K (estimate 200K). On a mildly positive note, February nonfarm payrolls were revised to 268K up from the prior estimate of 236K. All in all, a very disappointing report that fell short of even the most pessimistic estimates. If there is a silver lining here, future Federal Reserve (FED) speak is likely to shift to a much more “dovish” tone and in turn temper near-term concerns over a tapering off in the FED’s bond buying activity.

The payroll data followed several other high profile economic misses over the past couple weeks. The emerging “soft patch” coupled with expectations for poor first quarter earnings is starting to raise concern that another “spring swoon” could be in the making.

Since the markets bottomed in March of 2009, the S&P 500 has experienced three distinct periods of consolidation (2010/2011/2012) that all began during the month of April. The setbacks were triggered by growth worries stemming from external issues including the Eurozone debt crisis, the loss of the U.S. triple-A credit rating and fears of a double dip recession in the U.S.

While near-term headwinds certainly appear to be emerging, the macro environment is in much better shape relative to past consolidation periods. In the U.S., the housing sector continues to firm, labor conditions have improved and the FED’s foot remains firmly on the monetary gas pedal. In addition, FED Chairman Bernanke when asked about these seasonal pauses in growth opined that they were likely due to the distortion of seasonal adjustments to economic data and now that we are far enough away from the recession those seasonal factors ought to be pretty much “washed out”.  

While the hangover is never as fun as the party, I believe it would be premature to put a toe-tag on the rally in U.S. risk assets. While periods of consolidation can be very frustrating, we must also be cognizant of the fact that a lot of good news has been priced into the markets over the past few months and the developing “soft patch” in economic data is likely to cause investors to question what has been discounted in the markets and what is likely to come to fruition in the months ahead. Because of better macro environment, I believe if a corrective phase were to develop this Spring, it is likely to be shorter and shallower than past pullbacks (5% - 10%).

These corrective phases are akin to a flu shot – while the shot itself is painful, it is a necessary evil before the healing process can begin. In other words, I believe the consolidation process—while painful to go through—provides a mechanism to filter out the “weak holders” and “quick money guys” and allows shares to be repositioned to longer term investors at more attractive price points. As such, the U.S. equity markets remain attractive for longer term investors, especially relative to Treasuries and Cash.

First Quarter Earnings Season on Tap
The unofficial start to first quarter earnings season kicks off on Monday afternoon when Dow-component Alcoa reports results after the close of trading. Expectations heading into the quarter have been fading over the past few months as headwinds from Europe and “fiscal-drag” associated with the payroll tax increase have led to a paring in earnings estimates. According to Bloomberg data, overall earnings for the S&P 500 are currently forecast to fall 1.8%, well off the 1.5% growth forecasted at the end of December.  On the sector level, the Utilities are expected to post the strongest growth (+6.8%) while the Energy sector is expected to post the weakest (-6.3%).

Heading into earnings season the bar has been set extremely low following a wave of companies pre-announcing poor results. Paradoxically, I believe this could set the stage for a relief rally as there now appears to be plenty of room for upside surprises – stay tuned.

Economic Roundup
Last week’s block of economic data, while mostly positive, suggested that the U.S. economy may be on the cusp of entering into a “soft patch.” Ahead of Friday’s weaker than expected payroll data, the Institute of Supply Management (ISM) reported that both their Manufacturing and Services indexes fell in March. While both still remain in expansion-mode, the lower readings suggested that the rate of growth has slowed. Also somewhat concerning was the jump in initial jobless claims. This report is watched very closely as it provides investors with a weekly snapshot of the health of the labor markets.  This past week’s data showed claims jumping to 385,000, the highest level since late-November. In addition, the 4-week moving average—which helps smooth the week to week volatility—rose to 3543K – the highest level in five weeks. The 4-week moving average—which helps smooth the week to week volatility—rose to 354K – the highest level in five weeks. According to the Labor Department, results may have been skewed higher by “noise” surrounding the earlier than usual Good Friday and Easter holidays – stay tuned.

The Week Ahead:
The economic calendar will be backend loaded with the focal point being Friday’s report on Retail Sales. Other economic reports of interest include Small Business Optimism & Wholesale Inventories (Tue), Mortgage Applications (Wed), Jobless Claims (Thu), Producer Prices and a University of Michigan Confidence report on Friday. The earnings calendar will begin moving off the backburner this week with Dow-component Alcoa kicking things off on Monday afternoon. This week only 9 members of the S&P will report results, however, the floodgates will begin to open during the following week when 74 companies report. FED Heads will be out and about this week with a dozen speeches scheduled including two appearances by FED Chairman Bernanke (Monday & Friday).  The Federal Open Market Committee is also scheduled to release the meeting minutes from their March 19-20 meeting on Wednesday.


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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