Hawkish Views Weigh on Markets

The Dow Jones Industrial Average (Dow) fell 1.49%,the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.06%, the Standard & Poor’s 500® Index (S&P 500) dipped 1.07% and the NASDAQ Composite Index (NASDAQ) shed 0.80%.

August 12, 2013    |    By Mike Schwager

Performance for Week Ending 8/9/13:

The Dow Jones Industrial Average (Dow) fell 1.49%,the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.06%, the Standard & Poor’s 500® Index (S&P 500) dipped 1.07% and the NASDAQ Composite Index (NASDAQ) shed 0.80%. Sector breadth was negative as 9 of the 10 S&P sector groups finished lower. The Telecom sector (-2.47%) led the way lower followed by Financials (-1.92%) and Industrials (-1.20%).

Index* Closing Price 8/9/2013 Percentage Change for Week Ending 8/9/2013 Year-to-Date Percentage Change Through 8/9/2013





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 8/5/13 - 8/9/13

The major market indices finished the week lower on growing concern the Federal Reserve (FED) is set to curtail its bond-buying program as early as next month. After weeks of “damage control” following FED Chairman Bernanke’s initial hints at reducing bond buying activity, the FED now seems to be telegraphing that a September start to tapering has now become their base case. FED officials have continually stressed that any cutback in bond buying would be data dependent, therefore, this uptick in hawkishness*, at least on the surface, seems surprising in light of the recent weaker than expected payroll data and muted readings on inflation –the two main thresholds the FED has continually cited. However, away from those two focal points – both of which tend to be lagging in nature—other indicators (ISM, initial claims, trade deficit) are signaling a more robust recovery. Remember, FED policy is based on forward expectations and as stressed in their recent FOMC communiqué, they expect growth to “pick up” from its recent pace, suggesting stronger growth as the year progresses.

Over the course of last week, FED Presidents Lockhart (Atlanta), Evans (Chicago) and Fisher (Dallas) all suggested that a September tapering of the quantitative easing program is more likely than not. The comments from Evans caught investors off guard as he is considered to be an “uber-dove” and has been a vocal proponent of the bond buying activity. Adding to the hawkish tone were comments from Cleveland FED President Sandra Pianalto who said there has been “meaningful improvement” in the labor market and that a tapering of the central bank’s bond-buying program may be warranted if it continues to strengthen.

While economic data was limited last week, the reported data suggested a better tone to the economic recovery. In particular, the Commerce Department reported that the trade deficit narrowed more than forecast in June to the lowest level since October 2009 as crude oil imports declined and American companies shipped more goods abroad. The report suggests that real second-quarter GDP growth, all else being equal, will be revised higher and that economic momentum is stronger than the preliminary GDP data suggested. On the labor front, the 4-week moving average of initial jobless claims—which helps smooth the week to week volatility—fell to the lowest reading since November 2007. Also of note was the Institute for Supply Management’s (ISM) report on non-manufacturing (services) sector of the economy. The report showed their non-manufacturing index rising to the highest level since February. As with the prior week's better than expected ISM manufacturing survey, the “guts” of the non-manufacturing report were solid with the new orders and business activity components posting strong gains. The report is significant as service oriented business comprise almost 90% of the U.S. economy.

In a sense, last week’s sell-off shouldn’t have come as a complete surprise when taking into consideration the high levels of complacency in the marketplace. The CBOE Volatility Index (VIX) started last week just off the lowest levels in several years. As mentioned in these missive numerous times, the VIX tends to be a good barometer of “fear” in the market. Investor sentiment—fear and greed—also tend to be contrarian in nature, meaning fear is almost always lowest near market peaks and almost always highest near market troughs. With fear running near multi year lows, the odds that data points or news flow that went against the “bullish grain” would trigger a selloff had become elevated. This seemed to be at least partially responsible for last week’s sell-off, as the increased level of hawkishness by FED officials appears to have caught investors off guard.

The Week Ahead
The economic calendar will be the focal point during the upcoming week with a slew of top tier reports set to be released. Of note will be the July retail sales data, the July consumer and producer price indices, regional manufacturing reports from the New York and Philadelphia Federal Reserves, July housing starts and building permits, initial jobless claims, and the preliminary August University of Michigan consumer confidence survey. Second-quarter earnings season continues to wind down with fewer than 15 S&P 500 members reporting. FED speeches this week include Atlanta FED President Dennis Lockhart on Tuesday and St. Louis FED President James Bullard will speak on Wednesday and Thursday.

*Note: the term “hawkish” is often used to describe a central banker who favors higher interest rates, tighter monetary controls and restrictive credit policy.


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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