Houston, We Have Lift-off
The major market indices finished the week little changed as investors digested the third straight weekly decline in oil prices and the first rate hike by the Federal Reserve in almost a decade.
December 21, 2015
| By Mike Schwager
Performance for Week Ending 12/18/15:
The Dow Jones Industrial Average (Dow) fell 0.79%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) dipped 0.32%, the Standard & Poor’s 500 Index (S&P 500) lost 0.34% and the Nasdaq Composite Index (NASDAQ) shed 0.21%. Sector breadth was mixed with 6 of the S&P sector groups finishing lower while 4 finished higher. The Materials sector (-3.05%) was the worst performer while the Utility sector (+2.74%) was the best.
||Closing Price 12/18/2015
||Percentage Change for Week Ending 12/18/2015
||Year-to-Date Percentage Change Through 12/18/2015
*See below for Index Definitions
MARKET OBSERVATIONS: 12/14/15 – 12/18/15
The major market indices finished the week little changed as investors digested the third straight weekly decline in oil prices and the first rate hike by the Federal Reserve in almost a decade. Despite the modest weekly change, trading activity was anything but muted, as the Dow posted triple-digit moves in each session.
As expected, the Federal Open Market Committee (FOMC) meeting ended with the Fed raising rates by a quarter percent. The move had been well telegraphed and came as no surprise. The Fed cited improving labor market conditions and confidence that inflation will rise, over the medium term, to its 2 percent objective. Per the after meeting statement, “given the economic outlook, and recognizing the time it takes for policy actions to affect future economic outcomes, the Committee decided to raise the target range for the federal funds rate to 0.25% to 0.50% percent. The stance of monetary policy remains accommodative after this increase, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.”
The Fed also stated that the path forward will be very gradual, “the Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run. However, the actual path of the federal funds rate will depend on the economic outlook as informed by incoming data.”
According to the updated Summary of Economic Projections, the Fed anticipates hiking rates four times in 2016 (a quarter percent each time), unchanged from its September update. While the Fed’s projected path higher, especially relative to past rate hike cycles, is fairly modest, investors are currently discounting only 2 rate hikes next year. The differential seems to reflect a no confidence vote in the Fed’s economic projections, as they have been consistently too aggressive over the past couple years. Guggenheim’s firm view is for three hikes next year with the first coming at the March 18 meeting.
Despite all the ups and downs over the course of this year, markets currently have little to show for it in terms of performance as most of the major indices are more/less hugging the unchanged line. While the broader market has been stuck in neutral, at the sector level it's been more of a mixed bag. Energy is the worst performing sector reflecting the significant drawdown in oil prices. On the flip side, Consumer Discretionary has been the best performer as lower energy and gasoline prices put more money into consumer’s wallets. Elsewhere, Healthcare, which got off to a strong start, is now up only modestly as political rhetoric over drug price regulation has recently become a headwind to the sector. Utilities, which were last year’s best performing sector, are underperforming due to their sensitivity to rising rates.
While seasonals may come into play over the next couple weeks and ignite a year-end rally, it still feels like the market will finish the year not far from where it started.
As we look forward, the broader narrative that has supported the markets over the past few year’s remains intact and assuming no broad based deterioration in the macro environment and the Fed sticks to a very gradual approach – the outlook as we enter into 2016 should remain conducive to further upside: the US economy is in reasonably good shape, labor markets continue to recover, consumers should continue to benefit from lower energy costs, corporate America remains healthy and share buyback activity should remain a considerable driver of equity returns, and the interest rate environment should remain supportive of the equity markets.
With that said – 2016 is likely to produce only modest gains. With forward valuations at elevated levels, the pace of earnings growth will likely be the key driver of stock performance. According to Bloomberg, consensus expectations of 2016 earnings growth for the S&P 500 is just over 8%, although if energy prices remain weak and the dollar continues to strengthen, earnings may be subject to downward revisions.
Volatility is likely to be elevated in the coming year reflecting continued choppiness in commodity prices, divergent global central bank policies, the upcoming presidential election, and a likely uptick in geopolitical tensions—especially if oil prices stay depressed.
The prospects of falling into a Bear market (i.e. a 20%-plus decline) still appear low. In studying Bear markets, there are almost always certain things in place: a sharp spike in oil prices, tight monetary conditions, and/or a growing probability of a recession. It’s not likely that any of these conditions will develop in the foreseeable future.
The Week Ahead:
The data calendar will be front-end loaded reflecting the holiday shortened week (note: U.S. stock exchanges will close at 1:00 p.m. ET on Thursday and will be closed on Friday in observance of Christmas). Economic reports of interest include existing home sales, the second revision to third-quarter GDP, durable goods orders, personal income and spending, new home sales and the University of Michigan’s consumer sentiment survey. The earnings calendar will be light with only five members of the S&P 500 scheduled to report including Dow-component Nike. No members of the Fed are scheduled to speak during the week.
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 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.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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