/perspectives/weekly-viewpoint/focus-on-the-fundamentals

Focus on the Fundamentals

The major market indices finished the week mostly higher. During the week the Dow topped the 24K milestone for the first time ever as investors applauded progress on corporate tax reform and a batch of solid economic data.

December 04, 2017    |    By Mike Schwager

Performance for Week Ending 12/1/2017:

The Dow Jones Industrial Average (Dow) added 2.86%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.44%, the Standard & Poor’s 500 Index (S&P 500) tacked on 1.53% and the Nasdaq Composite Index (NASDAQ) dipped 0.6%. Sector performance was positive with 9 of the S&P groups finishing higher. The Telecom sector (+6.71%) was the best performer while Technology (-2.02%) was the worst.

Index* Closing Price 12/1/2017 Percentage Change for Week Ending 12/1/2017 Year-to-Date Percentage Change Through 12/1/2017
Dow 24231.59 +2.86% +22.61%
Wilshire 5000 27448.01 +1.44% +17.17%
S&P 500 2642.22 +1.53% +18.02%
NASDAQ 6847.59 -0.60% +27.20%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 11/27/2017 – 12/1/2017

The major market indices finished the week mostly higher. During the week the Dow topped the 24K milestone for the first time ever as investors applauded progress on corporate tax reform and a batch of solid economic data. In addition, the S&P 500 finished the month of November higher, marking the thirteenth straight month of gains.

The tech-heavy Nasdaq Composite finished lower for the first time in three weeks reflecting selling pressure in the broader Technology sector. At its recent peak, the tech sector was up nearly 40 percent on a year-to-date basis, and last week’s sell-off likely reflected investors locking in gains. The action is typical near the end of the year where “portfolio jockeying” comes into play as portfolio managers sell their winners and buy the sinners. In recent weeks, the best performing sector (Tech) has come under pressure whereas, Telecom, the worst performing sector has posted solid gains. Other year-to-date laggards (small-caps, value) have also sprung back to life.

Political uncertainty crept into the picture late in the week following media reports that former National Security Advisor Michael Flynn will testify about the President and Russia's alleged meddling in the 2016 election. The news sparked a broad-based sell-off, although reports that the Senate had the votes to advance tax reform, helped the market pare a good deal of the initial weakness. While the path forward for tax reform still faces many hurdles, the odds of a bill landing on President Trump’s desk by year-end have certainly improved. While it is difficult to quantify how much of tax reform is already priced into the market, it’s fair to say that any setbacks would not be viewed kindly by investors.

On the economic front, the US economy continues to gather steam. Mid-week the Commerce Department reported that the first revision to Q3 GDP showed the economy expanding by a better than expected 3.3%, ahead of the 3.2% expected by economists as well as the initial growth estimate 3.0%. The growth rate in the third quarter (which is still subject to a final revision) would mark the second consecutive quarter of 3%-plus growth. The momentum may carry into the current quarter as suggested by the Atlanta Fed’s GDP Now model which is forecasting Q4 growth of 3.47%.

Market View: We continue to believe the bull market remains intact and the “Goldilocks” economic environment (not too hot, not too cold) should help limit downside risk in the event of a correction. At the end of the day it’s fundamentals (economy, earnings, interest rates) that matter, and from a macro point of view, the world is enjoying a period of synchronized global growth, which has resulted in a favorable turn in the earnings environment. In addition, valuation levels—while certainly elevated—are far from extreme. If the market were to stage a near-term pullback, it would be viewed as healthy and an opportunity to add equity exposure to portfolios.

The Week Ahead: The data and earnings calendar slows a bit in the coming week. On the earnings front, only six members of the S&P 500 are scheduled to report. The economic calendar will be back end loaded with the focal point coming on Friday when the monthly payroll data will be released. According to Bloomberg, nonfarm payrolls are forecast to rise by 200K and the unemployment rate is expected to hang steady at 4.1%. Other data reports of interest include; October factory orders, the Institute for Supply Management’s (ISM) November non-manufacturing index, the November ADP Employment Report and the University of Michigan’s December consumer sentiment survey. The Fed speaking calendar will be nonexistent reflecting the traditional quiet period ahead of the upcoming (December 12 & 13) FOMC meeting.

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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