/perspectives/weekly-viewpoint/lift-off-appears-imminent

Lift Off Appears Imminent

The major market indices finished the week little changed as a late-week rally spurred by the better than expected monthly payroll report was offset by concerns earlier in the week over lackluster holiday sales and a disappointing policy announcement from the European Central Bank.

December 07, 2015    |    By Mike Schwager

Performance for Week Ending 12/4/15:

The Dow Jones Industrial Average (Dow) rose 0.28%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) dipped 0.17%, the Standard & Poor’s 500 Index (S&P 500) gained 0.08% and the Nasdaq Composite Index (NASDAQ) tacked on 0.29%. Sector breadth was mixed with 5 of the S&P sector groups finishing higher and 5 finishing lower.  The Technology sector (+1.62%) was the best performer while Energy (-4.51%) was the worst.

Index* Closing Price 12/4/2015 Percentage Change for Week Ending 12/4/2015 Year-to-Date Percentage Change Through 12/4/2015
Dow 17847.63 +0.28% +0.14%
Wilshire 5000 21501.74 -0.17% +1.00%
S&P 500 2091.69 +0.08% +1.59%
NASDAQ 5142.27 +0.29% +8.58%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/30/15 – 12/4/15

The major market indices finished the week little changed as a late-week rally spurred by the better than expected monthly payroll report was offset by concerns earlier in the week over lackluster holiday sales and a disappointing policy announcement from the European Central Bank.

According to the Labor Department, nonfarm payrolls expanded by 211K during November, slightly ahead of the 200K print expected by economists. The Labor Department also upwardly revised the prior two months payroll numbers, resulting in an additional 35K jobs. The unemployment rate held steady at 5.0%, on target with expectations. The report was viewed as Goldilocks in nature, “not too hot, not too cold” and in turn should keep the Fed on track for a “dovish” lift-off and a shallow path higher.

In a mid week speech, Fed Chair Yellen set the stage for the initial lift-off in rates at the upcoming FOMC meeting. Speaking on Wednesday at the Economic Club of Washington, Yellen noted that improvement in the labor market since October has bolstered her confidence in the inflation outlook. Yellen also reiterated that delaying policy normalization for too long could force the Fed to tighten “abruptly” later to avoid “significantly overshooting” its goals. Yellen also stated that she continues to expect the economy to grow at a “moderate pace" over the next several years, driven by domestic spending, a modest positive contribution from government spending, and a lessening of the drag from the energy sector and net trade. In terms of the international environment, which was a major reason the Fed held off raising rates at the September meeting, she noted that downside risks from abroad “have lessened since late summer,” and said that she expects the slowdown in China to remain “modest and gradual.”

The market seems to be ready for the “normalization” process to begin. Uncertainty surrounding the timing of the initial lift-off in rates has been a substantial headwind to the markets over the past few quarters. While the focus seems to have shifted from “when” to “how far, how fast,” assurance that the path forward will be very gradual has now become a prerequisite for the market to make a sustainable move higher, in my opinion. Bloomberg data shows that investors are currently betting that the Fed will only hike rates three times between now and the end of next year, suggesting that monetary policy should remain very supportive for risk assets for the foreseeable future.

The Week Ahead:
The data calendar will be back end loaded with the focal point being Friday’s release of November retail sales. Other reports of interest include the October Job Openings and Labor Turnover (JOLTS) the November Producer Price Index (PPI), and the University of Michigan’s consumer sentiment survey. There are just a handful of S&P 500 member companies scheduled to report during the upcoming week and due to the traditional blackout period ahead of FOMC meetings, Fed speeches will be almost nonexistent.

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 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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