/perspectives/weekly-viewpoint/is-it-time-to-ring-the-register

Is it Time to Ring the Register?

The Dow Jones Industrial Average (Dow) gained 0.64%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.17%, the Standard & Poor's 500 Index (S&P 500) rose by 1.07% and the NASDAQ Composite Index (NASDAQ) tacked on...

August 05, 2013    |    By Mike Schwager

Performance for Week Ending 8/2/13:

The Dow Jones Industrial Average (Dow) gained 0.64%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.17%, the Standard & Poor’s 500 Index (S&P 500) rose by 1.07% and the NASDAQ Composite Index (NASDAQ) tacked on 2.12%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Industrials sector (+2.14%) was the best performer while Telecom (-0.50%) was the worst.

Index* Closing Price 8/2/2013 Percentage Change for Week Ending 8/2/2013 Year-to-Date Percentage Change Through 8/2/2013

Dow

15658.36

+0.64%

+19.49%

Wilshire 5000

17793.02

+1.17%

+20.55%

S&P 500

1709.67

+1.07%

+19.88%

NASDAQ

3689.59

+2.12%

+22.19%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 7/29/13 - 8/2/13

The major market indices finished the week modestly higher as investors digested a trifecta of market moving data. The S&P closed the week above 1700 for the first time ever while the NASDAQ closed at the highest level in almost 13 years.

The two focal economic reports last week offered a mixed picture on the economy. On Wednesday the Commerce Department reported that the preliminary reading on second quarter GDP showed the economy expanded at a 1.7% rate, up solidly from the 1.1% rate observed in the first quarter and ahead of the 1.0% pace expected by economists. The better results were driven by an unexpected pickup in inventory building. The report also showed personal consumption rising by 1.8% during the quarter slightly better than the 1.6% estimate. On the flip side, Friday’s monthly employment data fell short of expectations. The Labor Department reported that nonfarm payrolls rose by 162K – well short of the 185K expected by economists and the lowest level in the last four months. In addition, the prior two months worth of data were revised lower, suggesting a lack of momentum in the labor markets. The unemployment rate fell to 7.4%(from 7.6%) while private payrolls—which filter out government hiring/firing—rose by a disappointing 161K (estimate 195K). During the month, average hourly earnings declined by 0.1% and average weekly hours worked dipped slightly. While both the GDP and Payroll reports confirm that the economic recovery is moving forward, they also suggest the pace of growth remains sub-par.

The other key event last week was the two-day Federal Open Market Committee (FOMC) meeting. While no changes to policy were expected to emerge from the meeting, investors were anticipating the release of the after meeting communiqué for hints on the timing of any tapering of the Federal Reserve’s (FED) bond buying program. The statement was nearly identical to the last meeting; however, there were some minor changes that gave the note a marginally “dovish” tone. In particular, the FED described current economic growth as “modest” versus the term “moderate” which was used in their last update. While the change seems subtle, in FED parlance the term “modest” tends to signal a less robust environment than the term “moderate.” Despite the change, the statement offered some balance as the committee noted they expect growth to “pick up” from its recent pace, suggesting they expect stronger growth in the second half of the year.

A more pointed change was the committee’s reference to inflation. The statement noted that the Committee “recognizes that inflation persistently below its 2% objective could pose risks to economic performance.” Also adding a new wrinkle was the FED’s mention of rising mortgage rates and the impact on housing. The statement said “the housing sector has been strengthening, but mortgage rates have risen somewhat.” Housing has been a key driver of economic grow over the past several quarters and the reference to elevated mortgage rates suggests the FED is growing concerned that they may become a headwind to growth.

While the recent spottiness in economic data suggests that the start of tapering could be pushed further into the future (versus consensus expectations of a September start), the nervousness surrounding tapering is not likely to go way. Following FED Chairman’s Bernanke’s speech several weeks ago, the concept of tapering has been let out of the bag and trying to undo it may be akin to trying to unscrambling an egg. The bottom-line is that tapering of the bond buying program is inevitable – the question now becomes WHEN. The FED has told us that their decision will be “data dependent’” and therefore economic data will continue to be the major focus in the weeks/months ahead.

As mentioned in prior updates, the market is in the process of transitioning from a liquidity driven phase to one that focuses more intently on economic and earnings conditions. While the FED has cited an improving outlook as their reason for potentially “tapering” their quantitative easing (QE) program in the months ahead, economic projections from private forecasters have started to come down. This rerating of economic growth expectations is occurring at a time when earnings forecasts over the next couple quarters are still projecting a relatively robust environment. This scenario, combined with the potential for a drift higher in interest rates and elevated levels of valuation could result in a rocky path in the near term. While the outlook for the equity market still remains attractive over the intermediate to longer term, the aforementioned factors suggest there is room for disappointment which in turn could lead to a period of consolidation in the near term.

The Week Ahead
The earnings calendar begins to wind down this week with approximately 60 members of the S &P 500 scheduled to report their quarterly results. The only Dow component scheduled to report this week is Walt Disney, on Tuesday. The economic calendar is relatively light this week with focal reports being the ISM non-manufacturing index (services) on Monday and initial jobless claims on Thursday. FED Heads will be out and about during the week with a handful of speeches on the docket. Other data of interest includes the Treasury Department auction of $32 billion of three-year notes on Tuesday, $24 billion of 10-year notes on Wednesday and $16 billion of 30-year notes on Thursday.


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.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

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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