/perspectives/weekly-viewpoint/fed-up

Fed Up

The major market indices finished the week broadly lower reflecting the ongoing plunge in oil and commodity prices. Oil finished the week near the lowest level in 7 years resulting from growing concern over global economic growth and OPEC’s failure to curb production levels at its recent meeting.

December 14, 2015    |    By Mike Schwager

Performance for Week Ending 12/11/15:

The Dow Jones Industrial Average (Dow) fell 3.36%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) dipped 3.92%, the Standard & Poor’s 500 Index (S&P 500) lost 3.79% and the Nasdaq Composite Index (NASDAQ) shed 4.06%. Sector breadth was negative with all 10 of the S&P sector groups finishing lower. The Energy sector (-6.50%) led the way lower followed by Financials (-5.37%) and Consumer Discretionary (-4.11%).

Index* Closing Price 12/11/2015 Percentage Change for Week Ending 12/11/2015 Year-to-Date Percentage Change Through 12/11/2015
Dow 17265.21 -3.26% -3.13%
Wilshire 5000 20659.59 -3.92% -2.96%
S&P 500 2012.37 -3.79% -2.26%
NASDAQ 4933.46 -4.06% +4.17%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 12/7/15 – 12/11/15

The major market indices finished the week broadly lower reflecting the ongoing plunge in oil and commodity prices.  Oil finished the week near the lowest level in 7 years resulting from growing concern over global economic growth and OPEC’s failure to curb production levels at its recent meeting. Trepidation ahead of the upcoming (Tuesday & Wednesday) Federal Open Market Committee (FOMC) meeting also weighed on market sentiment.  While it’s highly likely that the Fed will lift rates at the conclusion of the meeting and signal the path higher will be very gradual, how the market responds is still unknown.  The Fed’s after meeting statement is expected to be parsed very carefully as will the updated Summary of Economic Projections (SEP).  The September projections showed the Fed members were anticipating hiking rates by four times during 2016, a pace that is currently more aggressive than market expectations.

As said on these pages in prior weeks, uncertainty surrounding the timing of the initial lift-off in rates has been a considerable headwind to the markets over the past few quarters and assurance that the path higher will be very gradual has become a prerequisite for the market to make a sustainable move higher.  While the macro environment in the US remains supportive of additional upside, weak commodity prices and a stronger dollar will likely result in only modest earnings growth in the coming year.  With valuations resting near fair value, multiple expansion is likely to be limited, suggesting total returns will be a product of earnings growth and dividend yield.

Investors appear to be betting that returns outside of the US may be a bit more robust.  According to data from the Investment Company Institute (y-t-d through December 2), US mutual funds have seen net outflows of $155B, whereas, International funds have had $105B of net inflows. While the ICI doesn’t breakout specifically where international flows land, there is a good chance a lot of the money is headed toward Europe. The European economy is in the early innings of its recovery and the European Central Bank is in the midst of an aggressive quantitative easing program.  In addition, the weaker Euro should help boost exports while depressed profitability levels suggest upside potential as the economy continues to grow – stay tuned.

The Week Ahead:
The focal event of the coming week will be the final gathering of the year for the FOMC. The meeting will conclude at 2:00ET on Wednesday and the after meeting communiqué and update committee forecasts will be released at that time. Fed Chair Yellen will then hold a press conference at 2:30ET. It will be a busy week on the data front.  Reports of interest include the November Consumer Price Index (CPI), the December Empire State manufacturing survey, the December housing market index, November housing starts, November industrial production and capacity utilization, and the December Philadelphia Federal Reserve manufacturing survey. Earnings reports will be at a minimum with only nine members of the S&P 500 scheduled to report earnings during the week. Also of note will be quarter end options expiration (quadruple witching day) 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 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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