Fed Meeting on Tap, No Changes Expected
The Dow Jones Industrial Average (Dow) added 1.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 0.79%, the Standard & Poor’s 500® Index (S&P 500) gained 0.88% and the NASDAQ Composite Index (NASDAQ) finished up...
October 28, 2013
| By Mike Schwager
Performance for Week Ending 10/25/13:
The Dow Jones Industrial Average (Dow) added 1.11%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 0.79%, the Standard & Poor’s 500® Index (S&P 500) gained 0.88% and the NASDAQ Composite Index (NASDAQ) finished up 0.74%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Industrials (+2.21%) led the way higher followed by Utilities (+2.01%) and Consumer Discretionary (+1.98%).
||Closing Price 10/25/2013
||Percentage Change for Week Ending 10/25/2013
||Year-to-Date Percentage Change Through 10/25/2013
*See below for Index Definitions
MARKET OBSERVATIONS: 10/21/13 - 10/25/13
The major market indices finished the week with solid gains reflecting easing concerns over global economic growth and growing optimism the recent soft patch in U.S. economic data will postpone tapering efforts by the Federal Reserve (Fed) into the first quarter of next year. Adding to the positive tone was the better than expected trend in third quarter earnings and a drop in oil prices below $100/barrel. The latter has pushed the average price of regular unleaded gasoline down to $3.32 a gallon, the lowest level since late-January. The retreat in energy prices should be viewed as a de facto tax cut for the consumer. In addition, since gasoline is a high frequency purchase, declining prices could provide a significant boost to consumer sentiment as we head into the holiday season.
On the investor sentiment front, the American Association of Individual Investors (AAII), reported that bullish sentiment in the most recent period rose to 49.2%, the highest since January 24 and up from the prior week’s 46.3%. Bearish sentiment fell to 17.6% and now sits at the lowest level in 21 months. Sentiment readings tend to be contrarian in nature; therefore the low levels of bearishness may suggest that investors have become too complacent. This bears watching and should be viewed as a near term yellow caution flag.
While the longer term outlook for equities continues to be supported by expectations of improving global growth, healthy growth in corporate earnings, the favorable monetary environment and the likelihood that valuation will continue to expand on a more tactical basis, the markets have posted very solid gains since the start of the year, and therefore a period of consolidation wouldn’t be surprising.
Ultimately a pullback would be viewed as a healthy development as it would help filter out weak holders and allow for the repositioning of shares at cheaper prices for longer-term investors. In other words, if the markets were to pullback it would be seen as an opportunity to increase equity exposure.
With that said any pullback will likely be both short and shallow. This view reflects anecdotal evidence that many institutional investors have underperformed the markets on a year-to-date basis, which in turn should foster a “buy the dip” mentality as this group of investor’s attempts to play catch-up going into the year-end.
In addition, seasonal influences will likely come into play as the October through December period is historically the best quarter of the year. As noted by research firm Strategas, going back to 1950, fourth quarter performance has averaged a median return of 4.9% - just about double all other quarters on average.
September Payroll Report:
After being delayed by more than two weeks, the Labor Department finally released the September Payroll Report on Tuesday. The data showed that nonfarm payrolls rose by a much weaker than expected 148K, well below the 180K expected by economists. Private payrolls—which filter out government hiring/firing—rose be a very weak 126k, also well short of the 180K forecast by economists. The unemployment rate dipped to 7.2% (from 7.3%), the lowest since November 2008. Overall the payroll report suggests that momentum in the labor market has stalled. The weak jobs data coupled with uncertainty created by the government shutdown and the impending change in Fed leadership will likely push the first reduction in the Fed’s quantitative easing efforts into 2014.
Q3 Earnings Scorecard:
With the focus now shifting away from the fiscal battle in Washington to underlying fundamentals, investors will try to gauge whether economic and earnings data in the coming days justifies the recent run up in stock prices. So far third quarter earnings season has been very supportive. Through Friday, 243 members of the S&P 500 have reported quarterly results with overall earnings up by 8.4%. Of the 243 companies, 69.5% have beaten expectations while 16.9% have fallen short. The current “beat” rate is mildly better than the long-term average of 63%.
The Week Ahead
The focal point in the upcoming week will be the two day Federal Open Market Committee (FOMC) meeting. Due to the government shutdown and the weak September jobs numbers, no changes in monetary policy are expected. The after meeting communiqué will be released on Wednesday afternoon. The earnings calendar will remain front and center with approximately 125 members of the S&P 500 scheduled to report earnings. The economic calendar will also be busy as a mix of current and delayed reports will be released. Economic reports of interest include: September industrial production and capacity utilization, September pending home sales, September retail sales, the September Producer Price Index (PPI), the August Case-Shiller home price index, the October Conference Board consumer confidence survey, the September Consumer Price Index (CPI), the October ADP Employment Report, and the October ISM manufacturing survey. Also of note, three Fed officials are scheduled to make public appearances on Friday.
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.
American Association of Individual Investors – AAII is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.
Producer Price Index – PPI – is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.
S&P/Case-Shiller Home Price Indexes is a group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain metropolitan statistical areas (MSA) as well as a national index.
Consumer Confidence Index – CCI – is a survey by the Conference Board that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.
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.
NAHB/Wells Fargo Housing Market Index is an index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.
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 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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