/perspectives/weekly-viewpoint/markets-hit-new-high-despite-end-of-qe

Markets Hit New High despite End of QE

The major market indices finished higher for a second straight week with the S&P 500 and Dow closing the week at new all-time highs. The rally reflected building confidence that the U.S. economy is gaining momentum and will be able to weather the ending of the Federal Reserve’s (Fed) quantitative easing (QE) program.

November 03, 2014    |    By Mike Schwager

Performance for Week Ending 10/31/2014:

The Dow Jones Industrial Average (Dow) gained 3.48%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.83%, the Standard & Poor’s 500® Index (S&P 500) finished up 2.72% and the NASDAQ Composite Index (NASDAQ) tacked on 3.28%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Technology sector (+3.32%) led the way followed by Healthcare (+3.24%) and Financials (+3.24%).

Index* Closing Price 10/31/2014 Percentage Change for Week Ending 10/31/2014 Year-to-Date Percentage Change Through 10/31/2014

Dow

17390.52

+3.48%

+4.91%

Wilshire 5000

20862.17

+2.83%

+8.35%

S&P 500

2018.05

+2.72%

+9.18%

NASDAQ

4630.74

+3.28%

+10.87%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 10/27/2014-10/31/2014

The major market indices finished higher for a second straight week with the S&P 500 and Dow closing the week at new all-time highs. The rally reflected building confidence that the U.S. economy is gaining momentum and will be able to weather the ending of the Federal Reserve’s (Fed) quantitative easing (QE) program.  Better than expected third quarter earnings coupled with additional stimulus efforts by the Bank of Japan added to the positive sentiment. Since the closing low reached on October 15, the S&P has gained over 8 percent.

FOMC Meeting
As expected, the two-day Federal Open Market Committee (FOMC) meeting concluded with the Fed announcing the end of its bond buying efforts. This action has been well telegraphed and came as no surprise to investors. The focus of the meeting was more about what they said versus what they did.  On that front, in the after meeting statement the Fed upgraded its assessment of the labor market, citing solid job gains and diminishing underutilization. The Fed also reiterated that short-term interest rates will remain near zero for a "considerable time." Despite maintaining the considerable time phrase, the upbeat assessment of the labor markets was viewed as mildly hawkish and suggested that rate hikes could occur during the mid-to-latter half of next year if economic data continues to strengthen.

De Facto Tax Cut for Consumers
The price of oil has dropped to the lowest level in over two years reflecting rising supply and worries over demand due to slowing global growth. The silver lining to lower oil prices is that U.S. consumers are getting a de facto tax cut resulting from lower gasoline prices. Since peaking in late-April at $3.69 per gallon, the national average for gasoline, according to Triple-A, has declined to $3.00 per gallon. A rough rule of thumb is that every 1-cent decline in the price of gasoline equates to $1 billion of cost savings for the U.S. consumer on an annualized basis. If current prices are sustained this would equate to a substantial savings for consumers over the course of the year. In addition, since gasoline is a high frequency purchase, the pullback in prices should also bode well for consumer confidence as we enter into the all important holiday selling season.

Earnings Season
Third quarter earnings season also remained a bright spot last week. Through Friday, 362 members of the S&P 500 have reported quarterly results with overall earnings up by 9.7% (coming into earnings season analysts were forecasting sub-5 percent growth).  Of the 2362 companies, 75.7% have beaten expectations while 15.5% have fallen short.   The current “beat” rate remains solidly above the long-term average of 63%. Analysts have been revising expectations higher over the past few weeks with overall S&P 500 earnings now expected to rise by 8.0% while revenues are forecast to expand by 3.6%.

The Week Ahead:
The focal point of the upcoming week will be Friday’s Payroll report. According to Bloomberg, nonfarm payrolls are forecast to rise by 228K while the unemployment rate is expected to hang steady at 5.9 percent. Other economic reports of note include the October ISM manufacturing index, September construction spending, September factory orders, and October ISM non-manufacturing index. Following last week’s peak reporting period, earnings season will start to wind down this week as “only” 84 members of the S&P 500 are scheduled to report results. Several Fed speakers are on the docket this week including Fed Chair Yellen on Friday. Investors will monitor these speeches closely for clues on the timing of rate hikes. Mid-term elections are scheduled for Tuesday and may impact trading on Wednesday morning depending on the outcome.


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 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.

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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