/perspectives/weekly-viewpoint/geopolitical-tensions-weigh-on-stocks

Geopolitical Tensions Weigh on Stocks

The Dow Jones Industrial Average (Dow) fell 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.66%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.68% The Dow Jones Industrial Average (Dow) fell 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.66%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.68%...

June 16, 2014    |    By Mike Schwager

Performance for Week Ending 6/13/14:

The Dow Jones Industrial Average (Dow) fell 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.66%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.68% and the NASDAQ Composite Index (NASDAQ) closed down 0.25%. Sector breadth was negative as 9 of the 10 S&P sector groups finished lower. The Consumer Discretionary sector (-1.75%) was the worst performer while Energy (+1.66%) was the best.

Index* Closing Price 6/13/2014 Percentage Change for Week Ending 6/13/2014 Year-to-Date Percentage Change Through 6/13/2014

Dow

16775.74

-0.88%

+1.20%

Wilshire 5000

20118.87

-0.66%

+4.49%

S&P 500

1936.16

-0.68%

+4.75%

NASDAQ

4310.65

-0.25%

+3.21%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/9/14 - 6/13/14

The major market indices finished the week lower as investors took some profits off the table following recent gains. Escalating tensions in Iraq and the resulting jump in oil prices was a leading contributor to the negative tone, as was growing uncertainty in Washington following Eric Cantor’s primary defeat. In addition, there was anxiety ahead of the upcoming Federal Reserve (Fed) meeting over another “dots” shock and/or a press conference utterance from Fed Chair Janet Yellen that could disrupt the present policy expectations framework.

The pullback in stock prices shouldn’t come as a complete surprise as the market was a bit ahead of itself on a near term basis. Despite the weakness, selling pressure was orderly and volumes were very light throughout the week. This suggests that the sell-off may have been more of a “buyer’s strike” than a mad dash for the exits. While summer seasonality, mid-term election year patterns and the markets current valuation level may result in a sideways correction in the upcoming months, the intermediate to long-term outlook for the equity market remains intact. From a technical point of view, the market’s trend remains very strong and both breadth and momentum indicators have been improving. Couple these factors with favorable Fed policy and supportive credit conditions and downside risk should be contained.

Sentiment – Mixed Signals
A recent study by State Street’s Center for Applied Research showed investors at all wealth levels around the world holding elevated levels of cash. According to the data, U.S. investors hold an average of 36% of their assets in cash, an increase of 10 percentage points over the past two years (note - cash is defined by money held in savings and checking accounts as well as cash equivalents like money market funds).  While the increase in cash levels suggests a growing level of fear by investors, this contrasts with the most recent American Association of Individual Investors (AAII) sentiment poll, which showed bull sentiment as the highest reading this year.  While I’m a big believer in watching sentiment levels (especially at extremes) as they often provide contrarian signals, I also believe watching what people do is more important than what they say. As we know markets tend to climb a “Wall of Worry” and the rising cash levels suggests growing bearishness by investors. However, if the economy continues to improve as expected and equities continue to offer higher return opportunities relative to cash, then that growing pot of cash could eventually find its way back into the markets – stay tuned.

The Week Ahead

The focal point of the upcoming week will be the two day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday. The Fed is likely to reduce their bond buying program by another $10B/month to $35B/month. The meeting will be followed by a press conference by Fed Chair Janet Yellen as well as the release of updated economic projections (the so-called “dot plot”). The economic calendar picks up this week following a very light offering during the prior week. Reports of note include the June NY Empire State Index, May industrial production, the June National Association of Home Builders Housing Market Index, the May Consumer Price Index (CPI), May housing starts and building permits, and the June Philadelphia Fed Survey. The earnings calendar remains relatively quiet although investors will likely keep a close eye on Wednesday’s report from FedEx Corp. Due to its global reach and diverse customer base the company is considered an economic bellwether. Investors will look to the company’s results and forward guidance for insight into how the global economic recovery is proceeding. Quarter-end options expiration (quadruple witching) will occur on Friday and could make for volatile trading during the latter half of 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.

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.

NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.

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.

Consumer Price Index – (CPI) is a measure that examines the weighted average of prices of a basket of consumer goods and services, such as transportation, food and medical care. The CPI is calculated by taking price changes for each item in the predetermined basket of goods and averaging them; the goods are weighted according to their importance. Changes in CPI are used to assess price changes associated with the cost of living.

Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.

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 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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