/perspectives/weekly-viewpoint/market-looking-tired-but-big-picture-remains-intac

Market Looking Tired but Big Picture Remains Intact

The Dow Jones Industrial Average (Dow) added 0.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.17%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.22% and the NASDAQ Composite Index (NASDAQ) tacked on 0.06%.

September 08, 2014    |    By Mike Schwager

Performance for Week Ending 9/5/2014:

The Dow Jones Industrial Average (Dow) added 0.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.17%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.22% and the NASDAQ Composite Index (NASDAQ) tacked on 0.06%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Consumer Staples sector (+0.82%) led the way higher followed by Utilities (+0.77%) and Consumer Discretionary (+0.63%).

Index* Closing Price 9/5/2014 Percentage Change for Week Ending 9/5/2014 Year-to-Date Percentage Change Through 9/5/2014

Dow

17137.36

+0.23%

+3.38%

Wilshire 5000

20814.56

+0.17%

+7.94%

S&P 500

2007.71

+0.22%

+8.62%

NASDAQ

4582.90

+0.06%

+9.73%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 9/1/2014-9/5/2014

The major market indices finished the holiday shortened week little changed. Since early August markets have been on a tear, as witnessed by the almost 100 point trough to peak gain in the S&P 500.  During this four week window, U.S. economic data has been solid, geopolitical tensions have eased, and global markets have begun to stabilize. In other words, the macro environment has remained supportive which suggests the lackluster performance last week may be the market just catching its breath following the strong run. Seasonals may also be partly responsible as September historically has been a tough month for stocks.

While it wouldn’t be surprising to see the markets go through a mild consolidation phase in the near term, the downside risk would likely be both short and shallow.  Anecdotal evidence suggests that many large institutional investors have underperformed the markets on a year-to-date basis; this in turn should continue to foster a “buy the dip” mentality as this group of investor’s attempts to play catch-up going into the year-end.

The broader narrative also remains intact and the macro environment is expected to remain supportive of further gains. In other words, if the markets were to pullback, the weakness would be seen as a “pause to refresh” that sets the stage for the next leg higher. The U.S. economy looks poised to gather momentum over the next few quarters, the labor markets continue to recover, corporate earnings are likely to post solid gains both this year and next, inflationary pressure should remain muted, gasoline prices continue to trend lower and monetary policy is expected to remain loose through most of 2015. On the valuation front, the S&P is selling at approximately 15-times the 2015 consensus estimate; while not cheap, the market is certainly not ‘bubbly’ either.

ECB Cuts Rates:
One of the most anticipated events over the past few weeks was last week’s gathering of the European Central Bank (ECB). With ECB President Mario Draghi recently telegraphing that additional stimulus efforts may be forthcoming, the European economy hitting a soft patch, and deflation fears on the rise, investors had very high expectation heading into the meeting. At the conclusion of their gathering, the ECB delivered by announcing they would reduce key lending rates and introduce a program to start buying private debt. While the latter wasn’t the full scale quantitative easing program that many have been hoping for, it was still viewed positively and a step toward that direction.

Over the past couple months the ECB has announced two rate reductions, negative deposit rates, a new lending program (which begins later this month), as well as their intention to start buying private debt come October (asset backed securities/covered bonds). The latter two programs should help the ECB expand their balance sheet, which according to Draghi, they are targeting a $1 billion euro incremental expansion. While the ECB does not directly intervene in the currency market, their recent monetary actions have resulted in a sharp decline in the euro. A weaker euro makes European exports cheaper in the global marketplace, which should help spur an uptick in exports and in turn stabilize economic growth. European equity markets reacted very favorably to the stimulus measures as witnessed by this week’s 1.63% gain in the broader EuroStoxx 600 Index.

Payroll Report:
The Labor Department reported that nonfarm payrolls (NFP) rose by 142K, well below the 230K gain expected by economists. While the headline number was disappointing, the three month moving average remained at a solid 207K. The unemployment rate dipped to 6.1% (from 6.2%) and private payrolls gained 134K. Wages rose 0.2% in August and are up 2.1% on a year over year basis. While wages have been trending higher, they still remain fairly depressed and well below levels that would prompt the Federal Reserve (Fed) to worry.  All in all, the report was disappointing, mostly because it was so out of whack with the otherwise strong economic data of late. In general, payroll data tends to be volatile and is subject to revision. The markets lackluster response to the report suggested that investors realize that one month does not make a trend. In addition, the shortfall helped ease concerns that the labor markets were overheating and the Fed might be forced to push forward the lift-off date for rate hikes.

Data Wrap Up:
Economic data continued to signal that the U.S. economy is gaining traction. The Institute for Supply Management (ISM) reported that both the manufacturing and services sectors of the economy picked up momentum in August. On the manufacturing side, the ISM Manufacturing Index rose to 59.0 (readings above 50 signal expansion), the highest level since March 2011. In addition to the strong headline number, the forward looking new orders component rose to the highest level since April 2004. The ISM Non-Manufacturing (Services) Index rose to 59.6, the highest since August 2005. The report sets a favorable tone for broader economic growth as service oriented businesses account for almost 90 percent of the U.S. economy. Elsewhere, construction spending in July rose by a better than expected 1.8%, initial jobless claims (4-week moving average) remained near the lowest level in seven years, and monthly vehicle sales jumped to a seasonally adjusted annual rate of 17.45 million, the strongest reading since January 2006.

The Week Ahead:
With second quarter earnings season basically concluded, the earnings calendar will move to the backburner until mid-October when third quarter earnings reports start hitting. The economic calendar will also be relatively light with the focal report being Friday’s release of retail sales. Other reports of interest include the preliminary September University of Michigan consumer sentiment survey and July business inventories. The Fed speaking calendar is also very light with only Fed governor Daniel Tarullo scheduled to testify before the Senate Banking Committee on Tuesday. Former Fed Chairman Ben Bernanke will also be speaking this week at a credit union conference in Orlando, FL. While Bernanke no longer has any authority over monetary policy, his views are still watched very closely.  Another event of interest will be Apple’s press conference on Tuesday. There has been much hype heading into this event as the company is expected to rollout the new iPhone 6, the iWatch, and a slew of existing product revamps.


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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

ISM Non-Manufacturing Index is an index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.

Michigan Consumer Sentiment Index – MCSI is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy. 

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.

Past performance is no guarantee of future results. 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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