/perspectives/weekly-viewpoint/looking-beyond-the-noise

Looking Beyond the Noise

The major market indices finished the week modestly lower as a rally late in the week was unable to offset a midweek plunge.

May 22, 2017    |    By Mike Schwager

Performance for Week Ending 5/19/2017:

The Dow Jones Industrial Average (Dow) fell 0.44%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.38%, the Standard & Poor’s 500 Index (S&P 500) finished off 0.38% and the Nasdaq Composite Index (NASDAQ) shed 0.61%. Sector performance was negative with 7 of the 11 S&P sector groups finishing lower. The Real Estate (+1.23%) sector posted the best gain while Financials (-1.0%) posted the worst.

Index* Closing Price 5/19/2017 Percentage Change for Week Ending 5/19/2017 Year-to-Date Percentage Change Through 5/19/2017
Dow 20804.84 -0.44% +5.27%
Wilshire 5000 24762.35 -0.38% +4.86%
S&P 500 2381.73 -0.38% +6.38%
NASDAQ 6083.70 -0.61% +13.01%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 5/15/2017 – 5/19/2017

The major market indices finished the week modestly lower as a rally late in the week was unable to offset a midweek plunge. After a sleepy few weeks, volatility surged during the week on fears that political risk could morph into economic risk. The increased worries reflect revelations that President Trump may have shared sensitive information with Russian diplomats. In addition, a media report suggested that the President may have hinted to former F.B.I. director James B. Comey that he drop his investigation into former national security adviser Michael T. Flynn. The headlines continue to cloud the prospects of the Trump administration ability to push its pro-growth agenda of lower taxes and lighter regulation through Congress.

Investors Buy the Dip. Away from the political “noise” the macro drivers of stock prices remain in good shape, hence the snapback rally on Thursday and Friday. With first quarter earnings season just about wrapped up, year-over-year growth is tracking at a 15% pace, the strongest quarter in over 5 years. Economic growth also continues to stabilize. Industrial production surged 1.0% in April, the largest increase in over three years. Meanwhile, the Conference Board’s leading economic index (LEI) rose 0.3%, its fourth consecutive monthly gain. On a year-over-year basis the LEI gained 3.2%, just off the best reading since late-2015. Following this week’s batch of economic data, the Atlanta Fed GDP-Now tracking model is forecasting Q2 GDP growth of 4.1%, well ahead of the 0.7% gain during Q1.

Sentiment: Buy Fear, Sell Greed. Investor sentiment continued to trend lower last week with the American Association of Individual Investors (AAII) reporting that the percent of individual investors who are bullish on the market’s outlook plunged to 23.85 percent from 32.7 percent during the prior week and down from nearly 50 percent level following the election. Remember in its simplest form investing is all about emotions – fear & greed. These emotions also tend to be contrarian in nature, meaning investors tend to be the greediest (Bullish) at market tops and the most fearful (Bearish) at/near market bottoms.

Outlook Unchanged: In the near-term stocks are likely to remain stuck in a sideways trading range as investors weigh policy rhetoric against improving economic and earnings growth. Concern over elevated valuation levels may also limit near-term upside potential. However, on an intermediate term basis, the outlook for the US market still remains favorable. The economy continues to move forward and, most importantly, the earnings environment has turned positive. According to Bloomberg, earnings are forecast to post solid year-over-year growth trends in the coming quarters, which in turn, should help taper concerns over the current levels of valuation. If the market were to stage a pullback in the coming weeks/months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.

The Week Ahead: First-quarter earnings season continues to wind down with 18 members of the S&P 500 scheduled to report results during the week. On the data front, reports of interest include: April new home sales, the May PMI composite flash, April existing home sales, the minutes from the Federal Open Market Committee’s policy May meeting, April durable goods orders, the first revision to first-quarter GDP and the final University of Michigan’s May consumer sentiment survey. Fed Heads will be out and about with Federal Reserve officials scheduled to make nearly a dozen public appearances during the week. Other events to keep an eye on include the OPEC meeting on Thursday and the publication of the Trump fiscal 2018 budget (expected early in the week).

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.

Conference Board Leading Economic Index® are composite economic indexes. They are the key elements in an analytic system designed to signal peaks and troughs in the business cycle. The leading, coincident, and lagging economic indexes are essentially composite averages of several individual leading, coincident, or lagging indicators. They are constructed to summarize and reveal common turning point patterns in economic data in a clearer and more convincing manner than any individual component – primarily because they smooth out some of the volatility of individual components.

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.




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