Growth Scare Likely to Prove Temporary
Stocks finished the week mixed with the tech-heavy Nasdaq Composite outpacing the broader market averages.
Performance for Week Ending 7/29/16:
The Dow Jones Industrial Average (Dow) fell 0.75%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.05%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.07% and the Nasdaq Composite Index (NASDAQ) tacked on 1.22%. Sector performance was mixed with 7 of the S&P sector groups finishing lower and 3 finishing higher. The Technology sector (+1.55%) was the best performer while Energy (-2.06%) was the laggard.
||Closing Price 7/29/2016
||Percentage Change for Week Ending 7/29/2016
||Year-to-Date Percentage Change Through 7/29/2016
*See below for Index Definitions
MARKET OBSERVATIONS:7/25/16 – 7/29/16
Stocks finished the week mixed with the tech-heavy Nasdaq Composite outpacing the broader market averages. The catalyst for the Nasdaq’s outperformance was much better than forecast earnings reports from tech-bellwethers Apple, Google, and Amazon, among others. Weighing on the broader markets was a mixed batch of recent economic data that raised concerns the economic recovery may be faltering. Underscoring the concern was the much weaker than anticipated second quarter GDP report. According to the Commerce Department, the initial estimate of second quarter GDP showed the economy expanding by just 1.2%, well below the 2.5% gain expected by economists. First quarter GDP was also revised lower to show the economy growing by only 0.8% down from 1.1%. The Q2 miss was primarily due to a fall in inventories, which cut off 1.2% from growth. Business investment was also on the soft side. On a positive note, the second quarter data showed personal consumption expanding by 4.2%, a solid rebound from the muted 1.6% pace seen during the first quarter. In addition, falling inventories have been a significant drag on GDP growth for several consecutive quarters now, suggesting rebuilding efforts to replenish diminished inventories could become a net-positive in the coming quarters.
Also weighing on sentiment was the ongoing weakness in oil prices which has pushed crude down by nearly 20% from the June high and has left oil on the verge of meeting the technical definition of a bear market (i.e. down 20% from a prior high). After rallying by over 95% off the February lows, it is not surprising to see some backfilling in prices, especially in light of the recent strength in the US dollar and ongoing supply glut. Looking out over the remainder of the year, Guggenheim continues to believe that oil prices will end the year in the low $50 per barrel area as supply and demand metrics begin to come into equilibrium.
FOMC Meeting: As expected, at the conclusion of last week’s Federal Open Market Committee (FOMC) meeting the Fed left its interest rate policy unchanged. The after meeting communique had a mildly hawkish tone as the Fed said the “near-term risks to the economic outlook have diminished.” They added that “household spending is growing strongly” and the job market has “strengthened.” The statement certainly left the door open for a potential rate hike between now and the end of the year. Fed funds future, however, are still suggesting that the Fed will remain on hold for the foreseeable future with the first chance of a greater than 50% rate hike probability not coming until the September 2017 meeting. The sharp slowdown in second quarter GDP should certainly give the Fed reason to pause as they will likely want to see additional evidence of sustainable economic momentum before they make a move.
Q2 Earnings: Through Friday 316 members of the S&P 500 have reported second quarter earnings and overall results have been solidly better than expectations. Of the 316 companies that have reported, over 80% have surprised to the upside with an average “beat” of 4.5%. Overall earnings are currently down by 3.3%, but solidly better than the 5%-plus decline forecast at the start of earnings season. The second quarter is expected to be the last in a string of negative quarterly growth report with consensus expectations showing positive year-over-year growth in both the third and fourth quarters.
The Week Ahead: Earnings season will remain front and center with 118 member of the S&P 500 scheduled to report results. Included in this group are Dow components Pfizer Inc. and Proctor & Gamble. The focal point of the economic calendar will be the monthly Payroll report on Friday. According to Bloomberg, non-farm payrolls are expected to advance by 170K and the unemployment rate is forecast to dip to 4.8% (from 4.9%). Other data reports of interest include; the ISM July manufacturing index, June construction spending, July motor vehicle sales, July ADP employment report, July ISM non-manufacturing index, and June factory orders. The Fed speaking calendar will be very light with only Dallas Fed president Rob Kaplan scheduled to speak.
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.
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