Market Looks Tired - Will Gravity Begin to Trump Greed?
The Dow Jones Industrial Average (Dow) gained 0.51%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.76%, the Standard & Poor's 500 Index (S&P 500) rose by 0.71% and the NASDAQ Composite Index (NASDAQ) duped...
July 22, 2013
| By Mike Schwager
Performance for Week Ending 7/19/13:
The Dow Jones Industrial Average (Dow) gained 0.51%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.76%, the Standard & Poor’s 500 Index (S&P 500) rose by 0.71% and the NASDAQ Composite Index (NASDAQ) duped 0.35%. Sector breadth was positive as 7 of the 10 S&P sector groups finished higher. The Industrials sector (+2.17%) was the best performer while Technology (-1.80%) was the worst.
||Closing Price 7/19/2013
||Percentage Change for Week Ending 7/19/2013
||Year-to-Date Percentage Change Through 7/19/2013
*See below for Index Definitions
MARKET OBSERVATIONS: 7/15/13 - 7/19/13
The major market indices finished the week mixed as a batch of uneven economic and earnings reports offset a “dovish” two day testimony by Federal Reserve (FED) Chairman Ben Bernanke.
The market is currently transitioning from a liquidity driven phase to one that will focus more intently on economic and earnings conditions. The FED has cited an improving outlook as their reason for potentially “tapering” their quantitative easing (QE) program in the months ahead; however, economic projections from private forecasters have started to come down. Second quarter growth appears to be tracking well below the 1.8% posted in the first quarter and third and fourth quarter GDP estimates have also been coming down. This rerating of economic growth expectations is occurring at a time when earnings forecasts over the past few quarters are still projecting a relatively robust environment. This scenario, combined with the potential for a drift higher in interest rates could result in a rocky path in the near term, I feel. While the outlook for the equity market still remains attractive over the intermediate to longer term, the aforementioned factors, I believe, suggest there is room for disappointment which in turn could lead to a period of consolidation in the near term.
Also likely to become a larger issue in the weeks/months ahead, I feel, is the potential for another fiscal firestorm as policymakers struggle to find middle ground in the debt ceiling debate. Vitriol between political parties is at a fever pitch and neither side is likely to “blink” any time soon.
The focal point of the past week was the two day testimony by FED Chairman Bernanke to committees in both the House and Senate. Bernanke’s prepared remarks were pretty much a boiler plate of recent speeches and offered little in the way of new news. Bernanke reiterated that “tapering” remains conditional on incoming data, the FED has no “preset course” and they could increase or decrease QE based on how the economy performs. Bernanke reminded policymakers that any decision to taper should not be construed as willingness by the committee to raise interest rates. During the Q&A session, the FED Chairman said that it’s too early to say when the first reduction in QE will happen and that reducing QE at the September FOMC meeting is not a done deal.
The FED’s Beige Book report was also released last week and contained no real surprises. The report, which compiles snapshots of business conditions in each of the 12 FED bank districts, suggested that overall economic activity continues to improve at a modest to moderate pace (the same wording used in the prior update). Manufacturing expanded in most districts, with many reporting increases in new orders, shipments, and production. Most districts noted that overall consumer spending and auto sales increased during the reporting period. Residential real estate and construction activity increased at a moderate to strong pace in all reporting districts. Hiring held steady or increased at a measured pace in most districts while wage pressures generally remained contained. Price pressures (inflation) remained stable or modest.
U.S. economic data was mixed last week with soft housing starts and retail sales being offset by a strong Philly FED report and rising inflationary pressure. The recent uptick in mortgage rates may be starting to weigh on the housing market as witness by the larger than expected decline in housing starts. The Commerce Department reported that housing starts during the month of June fell by 9.9% (to an annual pace of 836K units), well below economists’ expectations and the slowest rate since August 2012. Building Permits—which tend to be a leading indicator of future construction—fell 7.5% to a 911K annual rate in June, the second straight decline after hitting a recent peak of 1.005 million in April. On the manufacturing front, the Philadelphia FED reported that manufacturing activity in the greater Philly region expanded at a much better than forecast pace. The Philly report followed a report from the New York FED that showed conditions for New York manufacturers also improved.
On the labor front, the Labor Department reported that initial jobless claims during the week ended July 13 fell 24K to 334K – the fewest since early May. Consumer Prices (CPI) during the month of June rose 0.5% while the “core” rate, which excludes food and energy, rose by 0.2%. On a year-over-year basis consumer prices are up 1.8% while the “core” rate has gained 1.6%. Elsewhere, the Commerce Department reported that Retail Sales during the month of June rose by a weaker than expected 0.4%. Sales excluding Autos were flat (0.0%) – well below the 0.5% gain expected by economists.
Last week rating agency Moody’s reaffirmed the U.S.'s sovereign AAA rating and increased the outlook to stable (Moody's has had a negative outlook on the U.S. since August 2011). In its analysis Moody's noted that economic fundamentals, the fiscal and financial health, including its debt profile, have all materially improved. However the rating agency did note that if economic growth does not pick up and the debt trajectory continues in an upward direction the rating could be moved down. Meanwhile, the city of Detroit has become the largest city in U.S. history to file for bankruptcy.
Quarter Earnings Summary
The tone of second quarter earnings season has been positive with overall growth currently trending at a better than forecast pace. Through Friday, 105 members of the S&P 500 have reported quarterly earnings with overall results up by 13.1%. Of the 105 companies, almost 65% have beaten expectations while 23.8% have fallen short. The current “beat” rate is moderately ahead of the 61% long-term average. On the revenue front, top-line growth, according to Bloomberg, is up 4.9%.
The Week Ahead
The earnings calendar is jam packed next week with 157 members of the S&P 500 scheduled to report. Included in this group are Dow components McDonald’s, AT&T, DuPont, Travelers, United Technologies, Boeing, Caterpillar, and 3M. Technology bellwethers Apple and Facebook are also slated to report results during the week. The economic calendar will also be closely watch with the focus on existing home sales, new home sales, durable goods orders, and the University of Michigan July consumer sentiment survey. There are no speeches by Federal Reserve officials scheduled this week reflecting the “blackout” period ahead of the following week’s FOMC meeting.
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.
The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.
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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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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