Lack of Fear is a Little Frightening
The major market indices finished the week mixed as stocks took a breather following recent gains. A batch of underwhelming earnings reports, mixed economic data, valuation concerns and caution ahead of the upcoming Federal Open Market Committee (FOMC) meeting kept many investors close to the sidelines.
April 25, 2016
| By Mike Schwager
Performance for Week Ending 4/22/2016:
The Dow Jones Industrial Average (Dow) gained 0.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.74%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.52% and the Nasdaq Composite Index (NASDAQ) dipped 0.65%. Sector breadth was mixed with 5 of the S&P sector groups finishing higher and 5 finishing lower. The Energy sector (+5.2%) led on the upside while the Utilities sector (-3.23%) was the laggard.
||Closing Price 4/22/2016
||Percentage Change for Week Ending 4/22/2016
||Year-to-Date Percentage Change Through 4/22/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 4/18/16 – 4/22/16
The major market indices finished the week mixed as stocks took a breather following recent gains. A batch of underwhelming earnings reports, mixed economic data, valuation concerns and caution ahead of the upcoming Federal Open Market Committee (FOMC) meeting kept many investors close to the sidelines. Oil prices tacked on another 8-plus percent during the week as investors shrugged off last weekend’s meeting between OPEC and non-OPEC members that failed to reach an agreement to freeze production. The strength in oil followed a report showing inventory levels grew at a slower than expected pace and an update from the International Energy Agency saying that 2016 would see the biggest fall in non-OPEC production in a generation.
Fed Meeting on Tap: The FOMC will hold a two-day policy meeting on Tuesday and Wednesday. While no change in rate policy is expected, investors will closely monitor the tone of the after meeting communique. While the market is discounting a zero percent chance of any rate hike, a slight change in tone could possibly be a risk to the market. With oil prices recovering, global markets stabilizing, wages picking up, jobless claims at the lowest level since 1973 – the Fed may choose to say that risks to growth and inflation are now ‘nearly balanced’. I don’t think it would be unreasonable for the Fed to take on a mildly ‘hawkish’ tone in light of the improving macro environment.
First quarter GDP, as indicated by the Atlanta Fed GDP Now model is looking lackluster, however, over the last several years a seasonal pattern to GDP growth has developed where weak first quarter growth has been followed by a strong rebound in the second quarter. Last week, Boston Fed president Rosengren also warned that he believes the market’s perceived rate path is too shallow and the bank may be closer to raising rates than is currently discounted in the market.
The S&P 500 has gained approximately 14% since the bottomed reached on February 11. The sharp snapback rally has resulted in elevated levels of complacency as suggested by the low readings on the VIX Index (aka fear index) and the recent plunge in the Credit Suisse Fear Barometer. Investing, in its simplest form, is about emotions – fear & greed. These emotions also tend to be contrarian in nature, meaning investors tend to be the least fearful (Bullish) at/near market tops and the most fearful (Bearish) at/near market bottoms. According to Dictionary.com, complacency is defined as “a feeling of quiet pleasure or security, often while unaware of some potential danger.”
Economic Data: Economic data continued to send a mixed signal on the health of the economy. The Philadelphia Federal Reserve reported that business conditions in the greater-Philly area returned to contraction territory during the month of April, while the forward looking components of the report suggested more weakness in the months ahead. The Commerce Department reported that housing starts declined 8.8% in March to a 1.089 million unit annual rate, the lowest level in five months. Building permits—which tend to be a leading indicator of future housing starts—fell 7.7%, the most in eight months. On the positive side of the ledger, the Labor Department reported that initial jobless claims during the week ended April 16 fell 6k to 247K, solidly better than the 265K expected by economists, and the lowest level since 1973. The National Association of Realtors reported that existing home sales rebounded 5.1% in March to a 5.33 million unit annual rate, better than the 3.9% increase forecast by economists. The 12-month average of sales continued to edge up, reaching 5.293 million units, its highest level since October 2007. Elsewhere, the recent strength in both Silver and Copper is noteworthy. Both metals are widely used in industrial applications and the uptick in prices could be suggesting building confidence in global economic growth.
The Week Ahead: The focal point of the upcoming week will be the two-day Federal Open Market Committee which will kick-off on Tuesday morning. The meeting statement will be released Wednesday at 2:00 p.m. ET. According to Bloomberg, the futures market is pricing in a zero percent probability of the target rate being raised. Earnings season will shift into high gear this week with 186 members of the S&P 500 scheduled to release results during the week. Eight members of the Dow Jones industrial average will be part of this group, including Apple, 3M, Du Pont, Procter & Gamble, Boeing, United Technologies, Chevron and Exxon Mobil. The data calendar will also be very busy. Economic reports of interest include March new home sales, March durable goods orders, the Conference Board’s April consumer confidence survey, the February Case-Shiller home price index, March pending home sales, first estimate of first-quarter GDP, March personal income and spending, and the University of Michigan’s April consumer sentiment survey. Presidential primaries on Tuesday (CT, DE, MD, PA, and RI) will also be of interest.
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.
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.”
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