/perspectives/weekly-viewpoint/entering-into-the-summer-doldrums

Entering into the Summer Doldrums

The focal point of the upcoming holiday shortened week (markets will be closed on Friday in observance of Independence Day) will be Thursday’s release of the monthly payroll figures. According to Bloomberg, nonfarm payrolls are expected...

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June 30, 2014    |    By Mike Schwager

Performance for Week Ending 6/27/14:

The Dow Jones Industrial Average (Dow) fell 0.56%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.04%, the Standard & Poor’s 500 Index® (S&P 500) finished off 0.10% and the NASDAQ Composite Index (NASDAQ) closed up 0.68%. Sector breadth was negative as 6 of the 10 S&P sector groups finished lower. The Consumer Discretionary sector (+1.03%) was the best performer while Industrials (-1.39%) was the worst.

Index* Closing Price 6/27/2014 Percentage Change for Week Ending 6/27/2014 Year-to-Date Percentage Change Through 6/27/2014

Dow

16851.84

-0.56%

+1.66%

Wilshire 5000

20400.41

-0.04%

+5.95%

S&P 500

1960.97

-0.10%

+6.09%

NASDAQ

4397.93

+0.68%

+5.30%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/23/14 - 6/27/14

The major market indices finished the week mixed with the S&P 500 posting its second loss in the past three weeks. Growing concerns over the vigor of the U.S. economic recovery, escalating geopolitical tensions and fears that an uptick in inflation could force the Federal Reserve (Fed) to tighten policy sooner than expected, all attributed to the lackluster performance. Despite the weakness, trading volumes were anemic suggesting more of a “buyer’s strike” versus a mad dash for the exits.

On the economic front, the Commerce Department released their final revision to first quarter GDP. The data showed the economy contracted by 2.9% during the quarter, the worst quarterly performance for the economy in five years. While the magnitude of the Q1 revision caught many off guard, we have to be cognizant that GDP data is “backward” looking as it reflects economic conditions from almost three months ago. Markets, on the other hand, tend to be forward looking; therefore placing too much emphasis on dated economic statistics is akin to trying to drive a car by looking in the rear view mirror. With that said growth metrics during the current quarter are pointing to a solid rebound in economic growth. Last week’s durable goods report, although disappointing on the surface, contained some nuggets of positive news. In particular, core orders for non-defense capital goods ex-aircraft—which are viewed as a proxy for business spending (Capex) and are a direct input into GDP—jumped 0.7%. Over the last three months, this data point has advanced at an 18% annualized rate, suggesting business spending is gaining momentum.  According to Bloomberg, economists are currently forecasting that second quarter growth will rebound to the +3.5% area and continue at a 3%-plus place during the second half of the year.

In other economic news, the Labor Department reported that initial jobless claims during the week ended June 21 fell 2K to 312K. The 4-week moving average—which helps smooth the week to week volatility—came in at 314K and remains just off the lowest levels since late-2007. The housing sector appears to be moving past the weather induced soft-patch. According to the National Association of Realtors sales of existing homes climbed 4.9% to a 4.89 million annualized rate in May, the most since October. 

Meanwhile, the Commerce Department reported that new home sales in May surged by 18.6% to an annualized pace of 504K. The monthly gain was the largest since January 1992 and left the index at the highest level since May 2008. In a nod that the housing recovery is on track, home building giant Lennar said last week that the homebuilding recovery was continuing at a “slow and steady pace” and fundamentals are being driven by high affordability while demand continues to outstrip supply. Consumer sentiment is also improving. The Conference Board reported that consumer confidence in June rose to the highest level in more than 6 years while the June Michigan Consumer Sentiment Index advanced at a better than expected pace reflecting the improving labor market, record stock prices and improved property values.

As we enter into the second half of the year, the macro environment over the next couple quarters is expected to remain supportive of further gains in the equity market. The U.S. economy looks poised to gather momentum over the next few quarters, the labor markets continue to recover, corporate earnings are likely to post solid gains both this year and next, inflationary pressure should remain muted, and monetary policy is expected to remain loose through most of 2015. In addition, corporate balance sheets are in very good shape, confidence among corporate CEO’s continues to improve and should result in a pickup in investment spending during the second half of the year, and the housing market should benefit from a pickup in household formations.

The Week Ahead

The focal point of the upcoming holiday shortened week (markets will be closed on Friday in observance of Independence Day) will be Thursday’s release of the monthly payroll figures. According to Bloomberg, nonfarm payrolls are expected to expand by 215K while the unemployment rate is forecast at 6.3% (unchanged from last month). Private payrolls—which filter out government hiring/firing—are expected to grow by 210K.  Other reports of interest include the June ISM Manufacturing Index, May construction spending, May factory orders, and the June ISM Non-Manufacturing Index. On the earnings front, only two members of the S&P 500 will report earnings next week. The Fed speaking calendar will also be light, although Fed Chair Janet Yellen is scheduled to speak 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 Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.

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.

Past performance is no guarantee of future results. 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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