/perspectives/weekly-viewpoint/focus-now-shifts-to-december-meeting

Focus now Shifts to December Meeting

The major market indices finished the week solidly higher after both the Bank of Japan (BoJ) and the US Federal Reserve (Fed) reiterated their commitments to accommodative monetary policies.

September 26, 2016    |    By Mike Schwager

Performance for Week Ending 9/23/16:

The Dow Jones Industrial Average (Dow) rose 0.76%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.42%, the Standard & Poor’s 500 Index (S&P 500) finished up 1.19% and the Nasdaq Composite Index (NASDAQ) tacked on 1.17%. Sector performance was positive with all 11 of the S&P sector groups finishing higher. The newly created Real Estate sector (+4.25%) was the best performer while Energy (+0.10%) was the laggard.

Index* Closing Price 9/23/2016 Percentage Change for Week Ending 9/23/2016 Year-to-Date Percentage Change Through 9/23/2016
Dow 18261.45 +0.76% +4.80%
Wilshire 5000 22557.11 +1.42% +6.56%
S&P 500 2164.69 +1.19% +5.91%
NASDAQ 5305.75 +1.17% +5.96%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 9/19/16 – 9/23/16

The major market indices finished the week solidly higher after both the Bank of Japan (BoJ) and the US Federal Reserve (Fed) reiterated their commitments to accommodative monetary policies. Loose policy has been a key driver of equity market performance and investors applauded the central bank’s decision to keep the monetary “punchbowl” in place.

At the conclusion of the BoJ meeting, the central bank said it would hold rates steady but announced it would modify its current policy framework in an attempt to boost inflation and jumpstart economic growth. Among the changes, the BoJ said it would introduce yield curve controls (a 0% target on the 10-year bond), eliminate the maturity range of its bond purchases, and confirmed that cutting rates further remained an option.

Anxiety was elevated ahead of the BoJ meeting following the disappointing European Central Bank meeting a few weeks ago where ECB President Draghi downplayed the need for more near-term economic stimulus in the Eurozone. Investors were fearful that if Japanese central bankers softened their policy stance it would be interrupted as an admission that the efficacy of monetary policy may have hit its limit.

As expected, the FOMC meeting also ended with no change to interest rate policy. While the after meeting communique signaled a growing likelihood of a rate hike at the December meeting, the ‘hawkish’ tone was overlooked by the generally upbeat comments on the broader economy and a signal that the path higher will be more gradual. Fed Chair Yellen commented that the “FOMC is generally pleased with how the U.S. economy is doing” and there is “definite evidence that economy is expanding more strongly.” The Fed also lowered the projected path forward. The central bank’s so-called “dot plot”, which it uses to signal its outlook for the path of interest rates, showed that officials expected one quarter-point rate increase this year and scaled back expectations for hikes in 2017. Policy makers now see two rate hikes next year, down from their June median projection of three.

Market View – Stay the Course: The path of least resistance over the coming quarters should continue to be skewed to the upside. While a pullback in stock prices certainly cannot be ruled out, a correction in prices would be viewed as healthy as it would help relieve some of the current “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 improve, 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 week ahead will be the first presidential debate between candidates Hillary Clinton and Donald Trump on Monday evening. Investors will listen for insight on the candidate’s viewpoints and how they may impact different areas of the economy and markets. A fresh round of speeches throughout the week by several Fed presidents and Chair Janet Yellen will be watched very closely for clues into the Fed’s next steps on interest rates. Reports of interest on the data calendar include August new home sales, the July S&P Case-Shiller home price index (HPI), the Conference Board’s September consumer confidence survey, August durable goods orders, August pending home sales, the second revision to second-quarter GDP. August personal income and spending, and the University of Michigan’s consumer sentiment survey. Earnings season will remain on the backburner for another few weeks as only 11 members of the S&P are scheduled to report results, including Dow-component Nike on Tuesday.

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 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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