Investors Slowly Tip Toeing Back into the Market

The Dow Jones Industrial Average (Dow) rose 0.13%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.11%, the Standard & Poor’s 500® Index (S&P 500) dipped 0.20% and the NASDAQ Composite Index (NASDAQ) finished up ...

January 21, 2014    |    By Mike Schwager

Performance for Week Ending 1/17/14:

The Dow Jones Industrial Average (Dow) rose 0.13%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.11%, the Standard & Poor’s 500® Index (S&P 500) dipped 0.20% and the NASDAQ Composite Index (NASDAQ) finished up 0.55%. Sector breadth was mixed with 6 of the S&P sector groups finishing lower while 4 finished higher. The Technology sector (+1.41%) was the best performer, while the Consumer Discretionary sector (-1.89%) was the worst.

Index* Closing Price 1/17/2014 Percentage Change for Week Ending 1/17/2014 Year-to-Date Percentage Change Through 1/17/2014





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 1/13/14 - 1/17/14

The major market indices finished the week mixed. After posting strong gains during the final month of 2013, the markets appear to have morphed into a period of ‘price discovery’ as investors try to gauge what is currently discounted in stock prices and what is likely to come to fruition in the coming weeks/months. With valuation levels roughly in line with their longer-term averages, investors are looking for earnings growth (versus multiple expansion) to become the primary driver of stock prices over the coming year.  Last week’s mixed batch of earnings reports seems to be casting some doubt over whether this transition is beginning to take shape. With that said, fears may be a bit premature. Through Friday, 52 members of the S&P 500 have reported quarterly results with overall earnings up by 15.0% (+13.7% ex-financials). While it is still very early in the quarter, the current pace of growth is solidly ahead of the 6% pace analysts are forecasting for the overall quarter.

Earnings expectations heading into the quarter have been muted due to a large number of negative preannouncements. According to Strategas Research the ratio of negative-to-positive earnings preannouncements prior to reporting season was almost 10 to 1. Strategas points out that such outsized readings have often led to outsized gains in the market during the reporting period itself. Their work shows that when the negative to positive preannouncement ratio is greater than 5, stocks have returned an average of 4.8% during the first month of reporting season.

Despite the uneven start for the market this year, when looking under the hood, many sectors and groups levered to the underlying economy, such as Transports, Small-caps, and Technology, have all outperformed the broader market suggesting healthy risk appetites and a belief that the economic recovery has legs – stay tuned.

Tapering Likely to Continue: Barring the recent payroll report, the majority of economic data over the past few weeks continues to suggest the economy remains on a self sustaining path to recovery. While the payroll data was unusually weak, most economists have chalked up the shortfall to weather related items and statistical noise – both of which should work their way out of the data in the next couple months. Just as investors had become comfortable with the Federal Reserve (Fed) starting to taper their quantitative easing program, the payroll report appeared to throw some sand in the gears,  which in turn created another level of uncertainty. (Note- the decision to taper was viewed as confirmation that the economy has become strong enough to be weaned off of QE).

Speeches from Fed officials over the course of last week however suggested that tapering efforts will in fact continue. Atlanta Fed President Lockhart said the economy remains on “solid footing” and cautioned investors not to overreact to one-month’s job report. Philly Fed President Charles Plosser said the Fed’s decision to taper was the right move and that the economy is on “firmer footing.” Dallas Fed President Richard Fisher said he was “pleased” with the Fed’s decision to taper and he would vote to continue tapering unless there was a dramatic change to the trajectory of the real economy.

Economic Round-Up: Economic reports over the past few weeks suggest that the strong momentum seen late last year is carrying over into the New Year. On the manufacturing front, both the New York and Philadelphia Federal Reserve banks reported that manufacturing activity in their regions expanded during January. In addition, both reports showed solid expansion in the employment component of the data. The Labor Department reported that weekly jobless claims fell to their lowest level since late-November while the Commerce Department reported that Retail Sales excluding Autos gained 0.7%, the best showing in almost a year. Elsewhere, the National Federation of Independent Business (NFIB) reported that optimism amongst small business owners increased during the month of December and now stands at the best level since September. Meanwhile, the Mortgage Bankers Association reported that mortgage applications in the week ended January 10 surged by over 11% reflecting solid gains in both the purchase and refi components.

Beige Book – Provides More Color on the Economic Recovery:  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 growth remained healthy in most regions during late-November and December. Nine of the Fed's 12 banking districts described growth as moderate, up from seven districts in the prior update.  Only two districts -- Boston and Philadelphia – said growth was modest, while Kansas City said it "held steady."  Three-quarters of the districts said shoppers spent more over the winter holidays. And all but Kansas City said manufacturing production grew. In contrast to the recent Payroll report, the Fed survey said two-thirds of the districts reported increases in hiring. 

Investor Sentiment Suggests Confusion:  The American Association of Individual Investors (AAII) reported that bullish sentiment in the most recent period fell to 39.0%, the lowest level since late-November. Interestingly, Bearish sentiment also fell to 21.5% while Neutral sentiment rose by over 8 percentage points to 39.5% - the highest reading since April 2005. The surge in Neutral sentiment suggests a high level of confusion in the market place as investors ponder the impact of tapering, the outlook for the economy, valuation levels, and concerns over whether companies will be able to deliver earnings growth.

The Week Ahead:  The U.S. financial markets will be closed on Monday in observance of Martin Luther King, Jr. Day. Earnings season will shift into high gear over the next two weeks with 70 members of the S&P 500 scheduled to report in the upcoming week followed by 130 in the next week. The economic calendar is relatively light with the only economic report of note, besides weekly initial jobless claims, being January existing home sales. Both reports will be released on Thursday. Other events of interest include the kick-off of the World Economic Forum in Davos, Switzerland and a batch of high profile economic data out of China on Monday.



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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

American Association of Individual Investors – AAII is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.

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.

Past performance is no guarantee of future results. 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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