Performance for Week Ending 10/28/16:
The Dow Jones Industrial Average (Dow) added 0.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.92%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.69% and the Nasdaq Composite Index (NASDAQ) shed 1.28%. Sector performance was negative with 7 of the 11 S&P sector groups finishing lower. The Real Estate sector (-3.40%) was the worst performer while Consumer Staples (+0.97%) was the best.
||Closing Price 10/28/16
||Percentage Change for Week Ending 10/28/16
||Year-to-Date Percentage Change Through 10/28/16
*See below for Index Definitions
MARKET OBSERVATIONS:10/24/16 – 10/28/16
The S&P 500 finished the week lower as investors pitted mixed earnings reports against mostly upbeat economic data and a flurry of merger & acquisition announcements. The upcoming Fed meeting, a rise in global sovereign bond yields and new uncertainty surrounding the US Presidential election added to the cautious tone.
On the earnings front, despite some high profiles misses and an uptick in companies issuing cautious forward guidance, overall earnings during the current reporting season continue to trend at a better than feared pace. Through Friday, 291 members of the S&P 500 have released results with just over 78% exceeding expectations. With more than half the members of the S&P reporting, overall earnings are tracking at a 1.6% growth rate, solidly ahead of the 1.6% decline forecast by analysts at the start of earnings season. On the sector level, upside surprises have been wide spread with 10 of the 11 broader sectors reporting better than forecast results.
Recent economic data has generally been better than expected and has resulted in rising worries that economic momentum could lead to an upward shift in the Fed’s “dot plot” at the December Federal Open Market Committee (FOMC) meeting. At the conclusion of the September FOMC meeting the “dots”—which the Fed uses to provide insight into its policy outlook—suggested two rate hike over the course of 2017. The recent economic strength coupled with an uptick in inflation expectations and the general stability of global markets have all contributed to rising concerns of a faster path higher.
Economy Showing Some Momentum: The Commerce Department reported that the initial estimate of third quarter GDP showed the economy expanding by 2.9%, solidly higher than the 2.6% gain expected by economists and the 1.4% pace during the second quarter. The Labor Department reported that initial jobless claims during the week ended October 22 fell 3k to 258K, the first decline in three weeks. Claims continue to hover near the lowest levels in almost 4-decades and have been below 300k for 86 consecutive weeks – a level typically associated with a healthy labor market. September pending home sales increased 1.5% in September, beating expectations for a more modest gain during the month. The latest increase suggests that existing home sales—which represent the bulk of real estate sales and are counted when transactions are completed—could have an upward bias in the coming months. The trade deficit dropped sharply in September, down by $3.1 billion to $56.1 billion, its lowest level since December 2013. Exports rose 0.9%, led by consumer, capital, and other goods. Imports fell 1.1% during the period. Lastly, the Markit manufacturing PMI increased to 53.2 during October, the highest level in nearly a year. The details of the report showed the forward looking new orders component grew at its fastest pace this year, backlogs continued to accumulate, and optimism about the 12-month outlook was the strongest since August 2015.
Market View – Stay the Course: While volatility is likely to stay elevated into next month’s Presidential election, the path of least resistance over the coming months should continue to be skewed to the upside. While a pullback in stock prices certainly cannot be ruled out, a market correction would be viewed as healthy as it would help relieve some of the “froth” in the market and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continued to strengthen, the likelihood of a recession remains relatively low, earnings growth is set to accelerate in the coming quarters and interest rates policy is expected to remain supportive of risk assets for the foreseeable future.
The Week Ahead: The focal point of the coming week will be the two-day Federal Open Market Committee starting on Tuesday. While the Fed is expected to leave policy unchanged, investors will look to the after meeting communique for clues on the forward path. The statement will be released Wednesday at 2:00 p.m. ET. Earnings reports will also remain front and center with nearly 130 members of the S&P 500 scheduled to release results throughout the week. The data calendar will also be busy. Economic reports of interest include: September personal income, the October Chicago Purchasing Manager’s Index (PMI), October motor vehicle sales, the October PMI manufacturing index, the Institute for Supply Management’s (ISM) October manufacturing index, September construction spending, the October ADP Employment Report, September factory orders, the ISM’s October non-manufacturing index. October jobs data—including the unemployment rate and the change in nonfarm payrolls—will cap off the week on Friday. According to Bloomberg, nonfarm payrolls are expected to expand by 175K while the unemployment rate is forecast to dip to 4.9% (from 5.0% in September).
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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