June Meeting in Play?
Market indices finished the week mixed, although the S&P 500 managed to finish higher for the first time in four weeks.
May 23, 2016
| By Mike Schwager
Performance for Week Ending 5/20/16:
The Dow Jones Industrial Average (Dow) fell 0.20%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.48%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.28% and the Nasdaq Composite Index (NASDAQ) gained 1.10%. Sector breadth was neutral with 5 of the S&P sector groups finishing higher and 5 finishing lower. The Energy (+1.51%) sector was the best performer while Utilities (-2.35%) lagged.
||Closing Price 5/20/2016
||Percentage Change for Week Ending 5/20/2016
||Year-to-Date Percentage Change Through 5/20/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 5/16/16 – 5/20/16
Market indices finished the week mixed, although the S&P 500 managed to finish higher for the first time in four weeks. Despite the modest performance, trading activity during the week was anything but lackluster as the broader market see-sawed between gains and losses each day as investors digested earnings, economic data and the FOMC meeting minutes. The tech-heavy Nasdaq Composite led on the upside reflecting solid gains in Apple following news that Warren Buffett’s Berkshire Hathaway acquired over $1 billion worth of the stock during the first quarter. The move by Buffett seemed to be viewed as a vote of confidence for the Technology sector as suggested by its solid advance on the week. Oil tacked on over 3% after a top-tier research firm turned more upbeat on the outlook for oil prices.
FOMC Meeting Minutes: The minutes from the April 26-27 FOMC meeting were released on Wednesday and the overall tone was much more ‘hawkish’ than expected. The term ‘hawkish’ suggests a bias toward raise rates or tighten monetary policy versus ‘dovish’ which means a desire to lower or keep policy loose. Referring to the upcoming June meeting, the minutes noted that officials “generally judged it appropriate to leave their policy options open and maintain the flexibility to make this decision.”
Anxiety around the rate situation was also prompted by two Fed officials reiterating that June remains a live meeting. Speaking in New York, Fed President Bill Dudley said “If I’m convinced that my own forecast is on track, then I think a tightening in the summer, the June-July time frame, is a reasonable expectation.” On the same day, speaking on Bloomberg Radio, Richmond Fed President Lacker said a June interest rate hike is in order with global risks having “entirely dissipated.”
According to Bloomberg, the odds of a June hike now stand at 28%, a seven fold increase from earlier in the week. While the Fed will likely continue to jawbone about the potential for a June hike, the market is still betting that the first hike won’t come until at least July, when the probability rises to above “even” (48%). The threat of the markets coming unhinged with a negative outcome to the UK’s vote whether to remain in the Euro area in the week that follows the June meeting seems to be a high hurdle for the Fed to overlook and could put them at risk of being labeled “reckless.” It appears that most investors feel waiting to at least the July meeting (6 weeks later) would give the Fed an opportunity to evaluate the Brexit vote and give them additional data points to gauge the health of the economy.
Likely prompting the uptick in the ‘hawkish’ sentiment amongst Fed officials has been the generally better tone to the incoming economic data. Two Friday’s ago the Commerce Department reported that retail sales during the month of April rose 1.3%, solidly above expectations. Last week we saw a 6.6% uptick in April housing starts to an annualized pace of 1172K units, solidly above economist’s expectations. Inflation is also starting to perk up as indicated by the April consumer price index. As reported by the Labor Department, consumer prices rose 0.4%, the biggest gain since February 2013. Manufacturing is also showing signs of life with industrial production rising 0.7% in April the most since November 2014.
The Week Ahead: Following the FOMC minutes and recent hawkish commentary, Fed speak will be the focal point of the upcoming week as investors look for additional clues into the timing of the next Fed rate hike. The highlight of the week will be Fed Chair Yellen who is set to speak publicly on Friday. Also making public appearances during the week will be St. Louis president James Bullard, San Francisco president John Williams, Philadelphia president Patrick Harker, Dallas president Robert Kaplan, and Governor Jerome Powell. Housing and manufacturing will be the focus of the upcoming data calendar. Reports of interest include the PMI Manufacturing Index, new home sales, durable goods orders, pending home sales, the first revision to first-quarter GDP and the University of Michigan consumer confidence survey. Earnings season will remain on the backburner with just 15 members of the S&P 500 scheduled to report results.
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.
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