‘Goldilocks’ Good for Stocks

The major market indices finished the week moderately higher reflecting a solid start to second quarter earnings season, a modestly “dovish” shift in tone from Fed Chair Yellen, and a strong rebound in the price of Oil.

July 17, 2017    |    By Mike Schwager

Performance for Week Ending 7/14/2017:

The Dow Jones Industrial Average (Dow) gained 1.04%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.39%, the Standard & Poor’s 500 Index (S&P 500) finished up 1.41% and the Nasdaq Composite Index (NASDAQ) tacked on 2.59%. Sector performance was positive with 9 of the 11 S&P sector groups finishing higher. The Technology (+3.76%) sector posted the best gain while Telecom (-1.02%) was the laggard.

Index* Closing Price 7/14/2017 Percentage Change for Week Ending 7/14/2017 Year-to-Date Percentage Change Through 7/14/2017
Dow 21637.74 +1.04% +9.49%
Wilshire 5000 25569.93 +1.39% +9.15%
S&P 500 2459.27 +1.41% +9.85%
NASDAQ 6312.46 +2.59% +17.26%

*See below for Index Definitions

MARKET OBSERVATIONS: 7/10/2017 – 7/14/2017

The major market indices finished the week moderately higher reflecting a solid start to second quarter earnings season, a modestly “dovish” shift in tone from Fed Chair Yellen, and a strong rebound in the price of Oil. Crude prices rallied for five straight sessions reflecting a larger than expected drawdown in inventory levels as well as a report from the International Energy Agency forecasting that global demand growth will accelerate this year to 1.4 million barrels per day, the strongest in two years.

Yellen Testimony: Fed Chairman Yellen took to Capitol Hill last week for her semi-annual testimony to Congress. Yellen’s testimony was a bit more dovish than expected as the Fed chief signaled that the Federal Reserve won’t rush to tighten monetary policy as inflation remains persistently below target. A similar message has been telegraphed by several other Fed officials recently and in turn has cast some doubt on the timing of the Fed’s next move in rates. According to the Bloomberg World Interest Rate Probability (WIRP) screen, the odds of a hike at the September meeting have declined to 10% while the December probability has fallen to 43% from nearly 52% last week.

In terms of the economy, Yellen cited a number of encouraging factors, including strong job gains and rising household wealth that she said should drive economic growth over the next couple years.

Q2 Earnings Season – Still early but So Far, So Good: Second quarter earnings season is off to a solid start. Through last Friday, 29 members of the S&P 500 have reported results with over 79% surprising to the upside. Revenues are also coming in better than expected with nearly 90% of companies beating top-line expectations. While it is still very early in the reporting season, overall S&P 500 earnings are tracking at a 14.6% year-over-year pace, exactly double the 7.3% growth analysts are forecasting for the full quarter.

Sentiment – Gloomy is Good: Investor sentiment continued to trend lower in the most recent measuring period with the American Association of Individual Investors (AAII) reporting that the percent of individual investors who are Bullish on the market’s outlook dipped to 28.2% from 29.6% during the prior week and down from nearly 50% just after the election. In its simplest form investing is all about emotions – fear & greed. These emotions also tend to be contrarian in nature, meaning investors tend to be the greediest (Bullish) at market tops and the most fearful (Bearish) at/near market bottoms. The low level of Bullish sentiment suggests the markets should continue to grind higher.

Beige Book – Some Additional Color on the Economy: The Federal Reserve’s Beige Book – an anecdotal summary of economic conditions compiled by the regional Fed Banks – reported that economic activity expanded, although at an uneven pace, across all districts in June. Consumer spending rose across a majority of districts, boosted by non-auto retail sales and tourism. Manufacturing activity continued to expand in most districts, with contacts reporting continued improvements in the energy sector. Labor market conditions continued to tighten, and most districts saw a modest to moderate pace of expansion. All in all, the report suggests the overall economy remains in good shape.

Bottom-Line - Outlook Unchanged: While we believe the bull market remains intact, elevated valuation levels and unfavorable seasonals during the summer months, raise the odds of some near-term turbulence. The “Goldilocks” environment (not too hot, not too cold), however, should help limit the downside risk. From a macro point of view, the world is enjoying a period of synchronized global growth, which in turn, has led to a favorable turn in the earnings environment. In addition, valuation levels—while not cheap—are far from excessive. If the market were to stage a pullback in the coming weeks/months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

The Week Ahead: Earnings season will be the focal point of the upcoming week with 69 members of the S&P 500 scheduled to report. Included in this group are nine components of the Dow Jones Industrial Average. The data calendar will be relatively light with a focus on regional manufacturing and housing. Economic reports of interest include the July Empire Manufacturing Survey, June housing starts and building permits, and the Philadelphia Fed’s July Business Outlook Survey. The Fed speaking calendar will be non-existent reflecting the traditional 10 day blackout period ahead of the July 25/26 FOMC meeting.


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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