/perspectives/weekly-viewpoint/investors-shift-to-wait-and-see-mode

Investors Shift to Wait and See Mode

Stocks finished the holiday shortened week modestly lower as investors took on a cautious tone ahead of the transfer of power to the new presidential administration.

January 23, 2017    |    By Mike Schwager

Performance for Week Ending 1/20/17:

The Dow Jones Industrial Average (Dow) fell 0.29%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.27%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.15% and the Nasdaq Composite Index (NASDAQ) dipped 0.34%. Sector performance was favorable with 8 of the 11 S&P sector groups finishing higher. The Consumer Staples (+1.93%) sector posted the best gains while Financials (-1.64%) lagged.

Index* Closing Price 1/20/2017 Percentage Change for Week Ending 1/20/2017 Year-to-Date Percentage Change Through 1/20/2017
Dow 19827.25 -0.29% +0.33%
Wilshire 5000 23743.68 -0.27% +1.36%
S&P 500 2271.31 -0.15% +1.45%
NASDAQ 5555.33 -0.34% +3.20%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 1/16/17 – 1/20/17

Stocks finished the holiday shortened week modestly lower as investors took on a cautious tone ahead of the transfer of power to the new presidential administration. The markets have now been range bound for several weeks as investors digest the post-election gains and await further clarity on the Trump “Big 3” pro-growth policies (tax reform, infrastructure spending, and deregulation).

The next leg higher will likely require specific details and certainty that these policies will be implemented on a timely basis. With that said, investors must remain cognizant that most of president Trump’s proposals are very complex and are likely to take some time to be put in place. In addition, the economic benefits of these changes are not likely to be felt for many months thereafter.

While political expectations are very elevated and have been the primary driver of the post-election rally, the underlying macro environment continues to be supportive. Last week, Federal Reserve Chairwoman Yellen stated the U.S. economy is “close” to the central bank’s objectives of full employment and stable prices and she’s confident it will continue to improve.

The most recent batch of economic data underscored Fed Chair Yellen’s comments of a strengthening economy. The Labor Department reported that initial jobless claims fell 15k to 234K, well below the 252K expected by economists. Jobless claims continue to hover around the lowest levels in almost 4-decades and have been below 300k for 98 consecutive weeks – a level typically associated with a healthy labor market. Meanwhile, the Commerce Department reported that housing starts during the month of December jumped by 11.3% to an annualized pace of 1226K units, solidly above the 1188K units expected by economists. The Philadelphia Federal Reserve reported that business conditions in the greater-Philly area expanded at a faster than expected pace during the month of January. The Philly Fed Index jumped to +23.6 (readings above 0 signal expansion) from +19.7 last month. The “guts” of the report were also solid with the forward looking new orders component surging to +26 from +14.9 last month.

Sentiment: The sideways action in the market over the past few weeks seems to be weighing on investor sentiment. Last week the American Association of Individual Investors (AAII) reported that the level of Bullish investors in their weekly survey fell to 37%, its lowest level since Nov. 3 and down from 44% during the prior week. Bearish investors rose to 33% while Neutral investors held steady at 30%. Despite the market’s positive tone over the past several quarters, the percent of Bullish investors has not exceeded 50% in over two years. The lack of extreme bullish readings, from a contrarian point of view, suggests that the market may have further room to run.

Bottom-Line: The broader narrative surrounding domestic equities remains largely unchanged. While the equity markets could see some consolidation in the near term—the improving economy, rebounding earnings growth, the resiliency in consumer spending, the ongoing stabilization in oil prices and low interest rate environment – all suggest the domestic equity markets should continue to have an upward bias over the intermediate term. If the markets were to pullback, the action would be viewed as corrective in nature and not the start of a longer-term downtrend.

The Week Ahead: Earnings season will move to the front burner in the coming week with 105 members of the S&P 500 scheduled to report. Included in this group are 12 members of the Dow Jones industrial average. On the data front, reports of interest include; December existing home sales, December new home sales, December durable goods orders, the initial estimate of fourth-quarter gross domestic product (GDP) and the University of Michigan’s January consumer sentiment survey. The Fed speaking calendar will be quiet reflecting the traditional blackout period ahead of the upcoming FOMC meeting.

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.

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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