Performance for Week Ending 4/7/2017:
The Dow Jones Industrial Average (Dow) fell 0.03%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost -0.36%, the Standard & Poor’s 500 Index (S&P 500) finished down 0.30% and the Nasdaq Composite Index (NASDAQ) shed 0.572%. Sector performance was positive with 7 of the 11 S&P sector groups finishing higher. The Real Estate (+0.63%) sector posted the best gain while Telecom (-1.10%) posted the worst.
||Closing Price 4/7/2017
||Percentage Change for Week Ending 4/7/2017
||Year-to-Date Percentage Change Through 4/7/2017
*See below for Index Definitions
MARKET OBSERVATIONS: 4/3/2017 – 4/7/2017
The major market indices finished the week mostly lower reflecting worries that the momentum in the economy is beginning to slow. An uptick in geopolitical tension, hints that the Federal Reserve will begin to unwind its balance sheet later this year, and a statement from House Speaker Paul Ryan saying that tax reform will likely take longer to accomplish than expected, all added to the cautious tone.
Jobs Report – Payroll Growth Stalls in March: Last week the Labor Department reported that nonfarm payrolls rose by a very disappointing 98K, well below the 180K expected by economists. Revisions to the previous two months subtracted a total of 38K jobs from payrolls, making for an average first-quarter rise of 178K a month. The underlying details of the rest of the report were less worrisome. The unemployment rate dropped to 4.5%, the lowest level since mid-2007 while wages during the month rose 0.2% and are trending at a 2.7% year-over-year pace. The nonfarm payroll data was clearly disappointing, however, the data may have been impacted by the blizzard conditions in the Midwest and Northeast during the survey week.
The weaker than expected payroll report added to the recent trend of softer than expected economic data. Earlier in the week, it was reported that March auto sales came in at a seasonal adjusted pace of 16.5 million. While still a solid number, the results were down from 17.5 million in February and the peak of 18.3 million reached in December. Meanwhile, the Institute for Supply Management (ISM) reported that service oriented companies (which account for about 90 percent of the economy) expanded during March at the slowest pace in five months. While one month does not make a trend and many indicators remain at elevated levels, this is something that we will certainly be monitoring in the coming months.
Fed Minutes: The meeting minutes from the March FOMC gathering were released mid-week. Investors had a keen interest in the minutes to try to glean additional insight to the rate hike that occurred at the conclusion of the meeting as well as insight into what the Fed plans to do with its bloated balance sheet. Overall the minutes gave a relatively upbeat assessment of economic conditions and included references to potential upside risks from fiscal policy. In terms of the balance sheet, which currently holds approximately $4.5 trillion of various types of bonds accumulated through the ‘quantitative easing’ process, the minutes noted that a change in balance sheet policy could begin later this year, as long as the economy continued to perform as expected.
The Fed’s balance sheet was around $1 trillion prior to the financial crisis and they have a strong desire to get back to more ‘normal’ levels. The process will need to be handled very gently and changes will need to be strongly telegraphed as the Fed risks putting upward pressure on interest rates. A sharp uptick in rates would make lending cost more expensive and risk choking off economic growth. This in turn could put undue pressure on the equity markets. The Fed is obviously aware of these risk and will likely proceed with caution.
In an uncharacteristic move, the Fed minutes also addressed the equity markets. The minutes noted that "some participants viewed equity prices as ‘quite high’ relative to standard valuation measures. It was observed that prices of other risk assets, such as emerging market stocks, high-yield corporate bonds, and commercial real estate, had also risen significantly in recent months."
Bottom-Line: 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. Earnings are forecast to post solid year-over-year growth trends in the coming quarters, which in turn, should help taper concerns over current levels of valuation.
The Week Ahead: First quarter earnings season will kick-off in earnest this week this week with six members of the S&P 500 scheduled to report including banking heavy weights JP Morgan, Wells-Fargo and Citigroup. On the data front, reports of interest include: the Labor Department’s February job openings and labor turnover survey (JOLTS), March import and export prices, the March Producer Price Index (PPI), the March Consumer Price Index (CPI), and March retail sales. Also of note is a presentation by Fed Chair Yellen at the University of Michigan on Monday.
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.
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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