/perspectives/weekly-viewpoint/goldilocks-payroll-report-eases-near-term-tapering

Goldilocks Payroll Report Eases Near Term Tapering Fears

The Dow Jones Industrial Average (Dow) rose 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.67%, the Standard & Poor’s 500 Index (S&P 500) gained 0.78% and the NASDAQ Composite Index (NASDAQ) tacked on 0.38%.

June 10, 2013    |    By Mike Schwager

Performance for Week Ending 6/7/13:

The Dow Jones Industrial Average (Dow) rose 0.88%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.67%, the Standard & Poor’s 500 Index (S&P 500) gained 0.78% and the NASDAQ Composite Index (NASDAQ) tacked on 0.38%. Sector breadth was positive as 9 of the 10 S&P sector groups finished higher. The Telecom (+1.94%) was the best performer while Materials (-0.31%) was the worst.

Index* Closing Price 6/7/2013 Percentage Change for Week Ending 6/7/2013 Year-to-Date Percentage Change Through 6/7/2013

Dow

15248.12

+0.88%

+16.36

Wilshire 5000

17009.59

+0.67%

+15.24%

S&P 500

1643.38

+0.78%

+15.23%

NASDAQ

3469.22

+0.38%

+14.89%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/3/13 - 6/7/13

The major market indices finished the week higher as a batch of mixed economic data eased fears over near term “tapering” of the Federal Reserve’s (FED) bond buying program. The market may also be starting to come to grips with the fact that “tapering” and tightening policy are two different things. As mentioned in these missives, tapering just means the FED will add liquidity into the markets at a lesser rate. The FED’s balance sheet will continue to grow, just at a slower pace (say $60 billion per month versus the current $85 billion per month pace). In addition, we also need to be cognizant that the FED is likely to ease up on the monetary gas pedal only in reaction to a strengthening of the underlying economy – which ultimately should bode well for the equity markets.

Payroll Report
On Friday, the Labor Department reported that nonfarm payrolls during the month of May rose by 175k, modestly better than the 165K expected by economists. The unemployment rate ticked up (from 7.5%) while private payrolls—which filter out government hiring/firing—rose by 178K. Average hourly earnings were flat (0.0%) and the average work week was unchanged at 34.5 hours. The report took on a “goldilocks” like feel, i.e. not too hot, not too cold. In other words, the labor market is still growing, but not at a pace that would warrant near-term tapering of the FED’s bond buying program.

Beige Book Provides Decent Color on the Economy
Last week the FED released its Beige Book report. The report, which compiles snapshots of business conditions in each of the 12 FED bank districts, suggested that overall economic activity through the May 24 measuring period increased at a “modest to moderate” pace across all but one of the districts. The exception was in the Dallas district, which reported “strong” economic growth. An improvement in the housing sector provided a notable boost along with more modest improvements in the manufacturing sector, bank lending, and transportation. Although employers continue to experience difficulties finding skilled workers, several districts noted an expansion of their workforces. In all, this report seemed consistent with recent economic reports.

Economic Roundup
Last week’s economic data was mixed with most reports suggesting that the pace of economic growth has slowed a bit. Manufacturing seems to have hit a rough patch during the month of May as witnessed by the Institute for Supply Management’s (ISM) manufacturing index. The report showed manufacturing activity contracting for the first time since last November. In addition, the “guts” of the report were weak with both the forward looking new orders component and the production component falling below 50 (50 is the dividing line between expansion and contraction). The ISM report was consistent with the most recent batch of regional manufacturing indices. Elsewhere, mortgage applications dipped for the fourth consecutive week following a sharp uptick in mortgage rates. While both factory orders and construction spending expanded, both fell short of economists’ expectations. On a positive note, the ISM nonmanufacturing (services) index rose to 53.7 in May (reading above 50 signal expansion) from 53.1 in April. This was an encouraging report as services oriented business account for the bulk of US economic activity.

Technicals
Technical considerations were also likely at work last week as the S&P 500 successfully held above its 50-day moving average. The 50-day is closely watched by the trading community and the successful “test” suggests underlying demand at this critical support level. Technical analysis is the study of price trends and patterns in the market place.  While many asset managers shrug off the use of technical analysis and consider the practice the equivalent of “market voodoo,” traders tend to use technical’s to help shape and define risk. Remember if enough eyeballs are focused on something then that event becomes important.

Other positives (at least from a contrarian point of view) included a decline in the level of bullish sentiment. According to the American Association of Individual Investors (AAII) investors calling themselves “bullish” dropped to 29.47% in the latest week, the lowest reading since late-April. In addition, on Wednesday the VIX Index (aka the fear index) jumped to the highest level since mid-April. These indicators may be suggesting that the recent selling pressure may have run its course – stay tuned.

The Week Ahead
The upcoming week will be relatively light in terms of news flow. With the kick-off to second quarter earnings season still about a month away the earnings calendar will remain on the back burner. The economic calendar is also light with the focal reports being retail sales and jobless claims (both on Wednesday) and the producer price index and the preliminary June University of Michigan consumer sentiment survey (both due out on Friday). The Treasury Department will auction $32 billion of three-year notes on Tuesday, $21 billion of 10-year notes on Wednesday and $13 billion of 30-year notes on Thursday. Other events of interest include the Bank of Japan two-day policy meeting on Monday and Tuesday. This will be watched very closely following the recent volatility in the Japanese markets.


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.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

Institute for Supply Management (ISM) Manufacturing and Non-Manufacturing Indices: The Manufacturing Index is a monthly composite index that is based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area. The index is released on the first business day of the month and covers the previous month’s data, which makes it particularly timely. If the index is above 50, it indicates that the economy is expanding. Values below 50 indicate a contraction.

The Chicago Board Options Exchange Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.

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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