Market Climbs a Wall of Worry

The major market indices finished the week modestly higher despite a currency devaluation in China, growing fears over the health of the global economy and another plunge energy prices.

August 14, 2015    |    By Mike Schwager

Performance for Week Ending 8/14/15:

The Dow Jones Industrial Average (Dow) rose 0.60%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.67%, the Standard & Poor’s 500 Index (S&P 500) gained 0.67% and the Nasdaq Composite Index (NASDAQ) tacked on 0.09%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Energy sector (+3.20%) led the way higher followed by Utilities (+2.33%) and Industrials (+1.20%).

Index* Closing Price 8/14/2015 Percentage Change for Week Ending 8/14/2015 Year-to-Date Percentage Change Through 8/14/2015





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 8/10/15 – 8/14/15

The major market indices finished the week modestly higher despite a currency devaluation in China, growing fears over the health of the global economy and another plunge energy prices. The market’s resiliency was encouraging and suggests investors are focused on the improving US macro environment (i.e. the better than feared Q2 earnings, improving economic conditions, low interest rate environment, and the growing likelihood the Fed will take a very gradual approach to tightening monetary policy).

China Devalues
The big news last week was China’s unexpected decision to devalue their currency in what appears to be an effort to help shore up their cooling economy. The move follows recent reports showing a large dip in exports as well as weakness in other parts of their economy. While the devaluation created a stir in the markets, the main concern seems to be what the move is saying about the trajectory of growth in the world’s second largest economy. While a lower currency should help to boost exports by making Chinese goods and services cheaper in the global marketplace, devaluation is often viewed as an action of last resort. This in turn sent a signal that Chinese policymakers may be running out of effective tools to combat weak growth. (Note - over the past 12 months Chinese rates have been cut several times, banks have been allowed to increase the amount of money they can lend out, and the government has been pumping billions of dollars to support the equity markets – none of these actions seem to be helping the flagging growth).

China’s action also seemed to have muddied investor’s expectations surrounding the timing of the Fed’s initial lift-off in rates. Cheaper Chinese exports are disinflationary as they will likely put downward pressure on US import prices. The flipside is that US goods and services (via a stronger dollar) will become less competitive on a global scale and could have an impact on growth and corporate earnings. The Fed has essentially painted itself in a corner through its ongoing messaging that a rate hike this year is more likely than not. A failure to act would likely hurt its credibility, something the Fed is not willing to accept. NY Fed President Dudley didn’t sound too alarmed in a speech last week about China’s devaluation. Dudley said it was “probably too soon to draw any conclusions” about what it would mean for the U.S. During the question-and-answer session, Dudley declined to pinpoint a date for when the Fed would start raising rates, but added “we are certainly getting nearer to that point.” Separately, Atlanta Fed President Lockhart stated that he is “very disposed” to the possibility of a September lift-off.

A recent Wall Street Journal poll showed most economists still feel lift-off will occur at the September FOMC meeting, although the wrinkle of the currency devaluation will likely ensure that the pace of hikes will be very gradual. This thought was echoed by Atlanta Fed’s Lockhart who said “gradual means something less frequently than every meeting.”

Economic Data
Last week’s batch of economic data showed the economy’s path continues in the right direction. On Thursday, the Commerce Department reported that retail sales during the month of July rose by 0.6%, a solid improvement from last month’s flat (0.0%) reading. Sales excluding autos gained 0.4% in July while the prior month’s data was revised to +0.4% from the initial estimate of -0.1%. Meanwhile, the Labor Department reported that initial jobless claims during the week ended August 8 rose by 5K to 274K, modestly above the 270K estimate forecast by economists but still near the lowest level in four decades. The 4-week moving average—which helps smooth the week to week volatility—fell to 266.3K, the lowest since April 2000.

Sentiment, Bad is Good
The American Association of Individual Investors (AAII) reported that Bears outnumbered Bulls for the 7th time in the last 10 weeks. The weekly survey from AAII showed Bullish investors at just 30.45% while investors considering themselves Bearish on the markets outlook came in at 36.15%. A negative Bull Bear spread (i.e. a higher percentage of Bears versus Bulls) has often been a precursor to a near term market bottom. Monitoring the level of bullish and bearish sentiment in the marketplace tends to be a useful barometer to gauge the mood of investors. Remember investment decisions, in their simplest form, are made with emotions – fear & greed. Sentiment also tends to be a contrarian indicator as investors tend to be the greediest (bullish) at market tops and the fearful (bearish) at market bottoms. The current sentiment readings suggest that the markets may be ripe for a near-term bounce --- stay tuned.

Q2 EPS Season
With over 90% of the members of the S&P 500 having already reported, the earnings season has shaped up to be much better than initially feared. Through Friday, 462 members of the S&P 500 have reported results with just over 68% surprising to the upside. Overall reported earnings for the S&P are currently down 1.8%, but still solidly better than the 5%-plus decline that was expected at the start of the reporting season. Expectations have been rising as a result of the better than expected trend and now analysts are forecasting a 2.1% decline when all is said and done – stay tuned.

The Week Ahead:
Retailers will make up the bulk of the earnings reports scheduled during the upcoming week, include bellwethers Home Depot and Wal-Mart Stores. Manufacturing and Housing data will dominate this week’s economic calendar. Reports of interest include: the August Empire State manufacturing survey, the National Association of Home Builders’ August housing market index, July housing starts and building permits, the August Philadelphia Federal Reserve survey and July existing home sales. Also of interest will be Wednesday’s release of the July FOMC meeting minutes.


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.

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