/perspectives/weekly-viewpoint/fiscal-uncertainty-weighs-on-the-markets

Fiscal Uncertainty Weighs on the Markets

The Dow Jones Industrial Average (Dow) lost 1.25%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.83%, the Standard & Poor’s 500® Index (S&P 500) declined by 1.06% and the NASDAQ Composite Index...

September 30, 2013    |    By Mike Schwager

Performance for Week Ending 9/27/13:

The Dow Jones Industrial Average (Dow) lost 1.25%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.83%, the Standard & Poor’s 500® Index (S&P 500) declined by 1.06% and the NASDAQ Composite Index (NASDAQ) tacked on 0.18%. Sector breadth was negative as all 10 of the S&P sector groups finished lower. The Consumer Staples (-2.05%) led the way lower followed by Financials (-1.92%) and Healthcare (-1.63%).

Index* Closing Price 9/27/13 Percentage Change for Week Ending 9/27/13 Year-to-Date Percentage Change Through 9/27/13

Dow

15258.24

-1.25%

+16.44%

Wilshire 5000

17667.13

-0.83%

+19.70%

S&P 500

1691.75

-1.06%

+18.62%

NASDAQ

3781.59

+0.18%

+25.24%

*See below for Index Definitions
 

MARKET OBSERVATIONS:9/23/13 - 9/27/13

The major indices finished the week mostly lower as the markets appear to have entered into a period of “price discovery” as trader’s try to gauge what’s already discounted in the market and what is likely to come to fruition in the weeks ahead. This process has investors trying to handicap the outcome of the fiscal follies in Washington as well as the timing of a reduction in the Federal Reserve’s (Fed’s) bond buying program.

Despite last week’s pullback, the complacency leading up to the fiscal showdown in Washington has been impressive, which leads one to wonder if investors are just whistling past the graveyard. The fact that policy showdowns over the past couple of years have all ended with an eleventh hour solution, seems to be pacifying investors. However, the polarization in Washington between the two parties is currently at a fever pitch with both sides vowing to stand firm. In other words, while investors have seen this movie before, a happy ending is no guarantee.

Investors face two deadlines in the coming weeks. The first comes on Tuesday, October 1 when the government may be forced to shut down if policymakers cannot agree to a budget for fiscal 2014. The second, and exponentially more serious, comes October 17 when the government is set to reach its debt ceiling limit. While a government shutdown would likely have some negative implications for economic growth, the failure to raise the debt ceiling could result in a technical default by the government and risk a sharp sell down in the markets and a backup in interest rates. This latter scenario was one of the primary reasons the Fed recently decided to keep their monetary stimulus in place at the last Federal Open Market Committee (FOMC) meeting.

While the outcome to the debt ceiling negotiations still remains very fluid, the only sure bet seems to be that volatility over the next couple weeks will likely be elevated. On a positive note, seasonals do become more favorable for investors in the latter half of October, however, in the near term I wouldn’t be surprised if investors choose to watch the Washington sideshow from the sidelines – stay tuned.

Economic Roundup
With the Fed recently postponing their decision to reduce their bond buying activity until further evidence the economic recovery is self-sustaining, last week’s data offered no real guidance. On the positive side, initial jobless claims during the week ended September 21 fell 5K to 305K. The 4-week moving average—which helps smooth the week to week volatility—came in at 308K, the lowest level since May 2007. Initial claims data is watched very closely as it provides an almost “real time” snap shot of the labor markets. The recent trend in the claims data suggests an improving labor market.

The housing market, however, is showing signs of slowing momentum likely a result of the recent back up in mortgage rates. Last week the National Association of Realtors reported that pending home sales (which tend to lead existing home sales by a couple months) dipped by a larger than forecast 1.6% during August. The weakness followed a 1.4% pullback in the prior month. On a positive note, Freddie Mac reported this week that the average rate on a 30-year fixed mortgage declined to 4.32% in the latest week, the lowest level since late-July suggesting rates could once again evolve into a tailwind for the sector.

The Week Ahead:
The focal point of the upcoming week will be Friday’s monthly payroll report. According to Bloomberg, economists are forecasting nonfarm payrolls of 180K and for the unemployment rate to hang steady at 7.3%. Private payrolls—which filter out government hiring/firing—are also expected to rise by 180K. Other economic reports of interest this week include; the September ISM manufacturing index, September motor vehicle sales, August construction spending, the September ISM non-manufacturing index, and August factory orders. Earnings season continues to slowly gear up with four members of the S&P 500 scheduled to report results. Other events of interest include a speech by Fed Chairman Bernanke on Wednesday as well as eleven other appearances from Fed officials during the week.


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.

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 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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