/perspectives/weekly-viewpoint/dow-20k-now-what

Dow 20K, Now What?

Stocks finished the week higher reflecting the solid start to fourth quarter earnings season and signs the US economy remains on firm footing.

January 30, 2017    |    By Mike Schwager

Performance for Week Ending 1/27/2017:

The Dow Jones Industrial Average (Dow) rose 1.34%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.12%, the Standard & Poor’s 500 Index (S&P 500) finished up 1.03% and the Nasdaq Composite Index (NASDAQ) tacked on 1.90%. Sector performance was mixed with 5 of the S&P sector groups finishing higher while 6 finished lower. The Materials (+3.44%) sector posted the best gains while Telecom (-1.74%) was the laggard.

Index* Closing Price 1/27/2017 Percentage Change for Week Ending 1/27/2017 Year-to-Date Percentage Change Through 1/27/2017
Dow 20093.78 +1.34% +1.68%
Wilshire 5000 24009.09 +1.12% +2.49%
S&P 500 2294.69 +1.03% +2.50%
NASDAQ 5660.78 +1.90% +5.16%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 1/23/2017 – 1/27/2017

Stocks finished the week higher reflecting the solid start to fourth quarter earnings season and signs the US economy remains on firm footing. During the week, the Dow, S&P 500 and Nasdaq Composite all posted new all-time highs. The Dow also reached a new milestone by closing above 20K for the first time ever.

The S&P 500 has now posted a total return of 7.7% since Election Day (the annualized equivalent of over 40%). The advance over recent days, however, has been on lighter than average trading volume and market breadth (advancing issues versus declining issues) has been underwhelming. Both indicators suggest that near-term conviction levels may be waning and the rally may be starting to run on tired legs.

Another potential yellow flag is the elevated levels of complacency as measured by the CBOE volatility Index (also known as the Fear Index). The volatility index (VIX) finished the week at 10.53, the lowest level since July 2014. Readings below 11 are rare, and in light of the contrarian nature of the VIX Index, often foreshadow a market correction.

While risks for a market pullback seem to be rising, the supportive macro environment should help buffer the overall downside risk. The economy has good momentum, interest rate policy remains supportive and, most importantly, the earnings environment has turned positive, after 5 consecutive quarters of contraction.

In trying to gauge the potential downside risk, technical analysis shows that a pullback in the range of 6% (roughly the average since the beginning of 2016) would equate to about 2155 on the S&P 500. This level also happens to coincides with the 200 day moving average, which has acted as a pretty solid level of support over the past 6-9 months.

Earnings Season Off to Good Start: Through Friday, 170 members of the S&P 500 have reported fourth quarter results with nearly 74% surprising to the upside. Overall S&P 500 earnings growth is currently tracking at a solid 4.4% pace, setting the stage for a second consecutive quarterly gain. Earnings will remain the focus throughout the next two weeks with over 180 members of the S&P scheduled to release results during the period. While bottom line results are certainly important, analysts will also be keenly focused on management commentary and their thoughts on things such as the strong dollar, trade policies, tax reform, deregulation, etc. and how these things may impact future business results.

The Week Ahead: The Federal Open Market Committee will hold its first meeting of 2017, starting on Tuesday. The meeting announcement will be released at approximately 2 p.m. on Wednesday. No change in interest rates is expected. Earnings season will remain on the front burner with 102 members of the S&P 500 scheduled to report, including five members of the Dow Jones average. On the data front, reports of interest include; December personal income and spending, December pending home sales index, the November Case-Shiller home price index, the Conference Board’s January consumer confidence, the January ADP Employment Report, the ISM’s January manufacturing index, December construction spending and the January ISM’s non-manufacturing index, and the January Payroll data. The Fed speaking calendar will be relatively quiet with only Chicago Fed president Charles Evans scheduled to speak on Friday.

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.

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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