Election on Tap

The Dow Jones Industrial Average (Dow) fell 0.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.29%, the Standard & Poor’s 500® Index (S&P 500) added 0.16% and the NASDAQ Composite Index (NASDAQ) shed 0.19%. Sector breadth was mixed as...

November 05, 2012    |    By Mike Schwager

Performance for Week Ending 11/2/12:

The Dow Jones Industrial Average (Dow) fell 0.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.29%, the Standard & Poor’s 500® Index (S&P 500) added 0.16% and the NASDAQ Composite Index (NASDAQ) shed 0.19%. Sector breadth was mixed as six of the S&P sector groups finished lower while four finished higher.

Index* Closing Price 11/2/12 Percentage Change for Week Ending 11/2/12 Year-to-Date Percentage Change Through 11/2/12





Wilshire 5000




S&P 500








*See Last Page for Index Definitions    

MARKET OBSERVATIONS: 10/29/12 - 11/2/12

The major market indices finished the storm shortened week little changed as political uncertainty ahead of the Presidential election outweighed a fresh batch of solid U.S. economic data and signs the Chinese economy may be troughing. 

The focus will now shift to the election and then the fiscal cliff.  The good news is that both events come with a time stamp, meaning the result of the election will be known in a few days, while the fiscal cliff will happen (or not) by the end of the year. In terms of the election, the Electoral College math still seems to favor a win by the incumbent, however, polling data suggests that the race is a virtual tie making it too close to call. While the results of Tuesday’s election will certainly help in getting a better feel for how the fiscal cliff plays out, I continue to believe that even a bad outcome in terms of the fiscal cliff may at least be partially offset by the removal of uncertainty. As mentioned in last week’s Viewpoint, the one thing both businesses and investors despise is not knowing the rules of the game. Therefore, if businesses and investors ultimately know where tax rates, etc. are going, they can better plan for the change and position their businesses/portfolios to operate more effectively within the new framework.

Despite the recent choppiness in the markets, I continue to believe the path of least resistance over the next few quarters will be higher. The combination of attractive valuation, favorable Federal Reserve (FED) policy, eventual clarity on the fiscal front and expectations of steady (albeit sluggish) economic growth should be supportive for risk assets. As a result, I believe periods of consolidation should be used as an opportunity to scale into the markets, especially for longer term investors.

Jobs Report
Last week the Labor Department reported that non-farm payrolls rose by 171K well ahead of the 125K expected by economists.  In addition, the September data was revised upward to 148K from the prior estimate of 114K. As expected, the unemployment rate rose to 7.9% from 7.8%.  Private payrolls—which filter out government hiring/firing—rose by 184K; also well ahead of the 123K expected by economists.  While the headline payroll numbers were favorable, hours worked fell short of economists’ expectations and average hourly earnings climbed by just 1.6% from a year earlier, the smallest gain since at least 2007. 

While payroll growth seems to be displaying good momentum, the overall modest pace of job growth will not keep the FED from providing ongoing liquidity to the market in the form of bond buying activity.  The FED has stated that they intend to keep policy loose until the rate of unemployment declines. With their long-term central tendency rate of unemployment within a range of 5.2%-6.0%, we still have quite a way to fall from the current 7.9% level.

Storm Sandy
“Super storm” Sandy swept through the Northeast resulting in massive amounts of damage and severe interruptions in business activity. With damage estimates rising to as much as $50 billion (reflecting both property damage and lost revenues/sales, etc. from business disruptions) the storm is likely to have a near-term negative impact on the economy. However, near-term pain from natural disaster has historically resulted in medium-term gain.  In other words, while there will be economic consequences from the storm in the near-term, the rebuilding efforts will likely offset any initial hit to the economy.
While it’s nearly impossible to accurately quantify the overall impact to growth, consensus expectations range from a “wash” to mildly additive to growth.

Economic Roundup
An underlying theme over the past few weeks has been the resiliency of consumer related data relative to business investment. Uncertainty surrounding the pending fiscal cliff is likely the reason that business sentiment remains at a standstill, whereas consumers are likely focusing on the “wealth effect” resulting from the overall solid gains in the stock market and the stability in the housing sector as well as the low interest rate environment and the pullback in gasoline prices. Last week the Conference Board reported that consumer confidence in October rose to the highest level since February 2008.  This likely accounted for the 0.8% jump in personal spending in September, the most since February.  With consumer spending accounting for over 70% of economic growth in the U.S., the recent trend is encouraging.

Q3 Earnings
The earnings season continues to wind down. Overall results have been mixed but solidly better than the dire expectations analysts were forecasting coming into earnings season. Through Friday, 381 members of the S&P have reported results with overall earnings up by 4.0%. Of the companies that have reported, 63.4% have beaten expectations while 25.5% have fallen short. The current “beat” rate is slightly better than the 61% long-term average. When all is said and done, analysts expect S&P 500 earnings to grow by 3.1% in the quarter.

The Week Ahead:
The focal point of the upcoming week will be the Presidential election on Tuesday. Markets are expected to be very quiet in the early part of the week although volatility is likely to pickup as ongoing news flow on the election is broadcast. On the economic front, the calendar is relatively light with reports of interest being ISM non-manufacturing (services) on Monday, jobless claims on Thursday and the University of Michigan confidence report on Friday. On the earnings front 71 members of the S&P 500 scheduled to report results this week.


Despite sluggish near-term economic growth, I believe the current environment remains constructive for risk assets. Domestic growth will be constrained in the near-term as a result of headwinds from slowing global economic growth and policy uncertainty. However, with the FED targeting economic growth through very accommodative monetary policy and the housing market beginning to recover, the threat of a recession has been taken off the table. In addition, as uncertainty surrounding fiscal policy dissipates, businesses are likely to begin boosting capex spending, which in turn could be a catalyst for a pickup in hiring. 

The U.S. equity markets remain well positioned for positive performance especially relative to both cash and Treasury bonds. This upbeat view reflects the markets attractive valuation, the overall healthy nature of corporate balance sheets and the commitment from the FED to maintain accommodative monetary policy through at least mid-2015.  European equities also appear undervalued at current levels and the European Central Bank’s pledge to do “whatever it takes” to save the euro should provide additional support for those assets.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


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.


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