/perspectives/weekly-viewpoint/markets-rebound-following-verbal-intervention”

Markets Rebound Following “Verbal Intervention” 

The Dow Jones Industrial Average (Dow) gained 0.74%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.06%, the Standard & Poor's 500 Index (S&P 500) rose by 0.87% and the NASDAQ Composite Index (NASDAQ) tacked on...

July 01, 2013    |    By Mike Schwager

Performance for Week Ending 6/28/13:

The Dow Jones Industrial Average (Dow) gained 0.74%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.06%, the Standard & Poor's 500 Index (S&P 500) rose by 0.87% and the NASDAQ Composite Index (NASDAQ) tacked on 1.37%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Utilities sector (+2.99%) was the best performer while Materials (-1.45%) was the worst.

Index* Closing Price 6/28/2013 Percentage Change for Week Ending 6/28/2013 Year-to-Date Percentage Change Through 6/28/2013

Dow

14909.60

+0.74%

+13.78%

Wilshire 5000

16654.74

+1.06%

+12.84%

S&P 500

1606.28

+0.87%

+12.63%

NASDAQ

3403.25

+1.37%

+12.71%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/24/13 - 6/28/13

The major market indices finished the week higher as investors took advantage of the recent weakness to add equity exposure to their portfolios. Adding to the positive sentiment was a batch of solid economic data and a parade of central bankers doing ‘damage control’ following Federal Reserve (FED) Chairman Bernanke’s June 19 press conference. Despite the rebound, the S&P 500 fell 1.5% during the month of June, the first monthly decline since last October.

FED Heads Taper "tapering" Expectations
In a series of FED appearances last week, central bankers were on a mission to clarify that tapering is not tightening, cutting back on the bond buying program will be data dependent, and rate hikes are not on the horizon. What was most impressive was the uniformity of the message, with even more “hawkish” members of the FED in synch with Bernanke’s message. President William Dudley stated that “if labor market conditions and the economy’s growth momentum were to be less favorable than in the FOMC’s outlook -- and this is what has happened in recent years -- I would expect that the asset purchases would continue at a higher pace for longer.” Atlanta FED President Dennis Lockhart said “In my view, the comments by the chairman do not constitute an enormous shift in policy. I still anticipate that the very low interest-rate policy will remain in place for a considerable time after the end of asset purchases, and thus policy will remain highly accommodative.” Even Richmond FED President Jeff Lacker, considered one of the most hawkish, or anti-inflation minded, officials on the FED 's policy-setting committee said the FED is not only leaving the proverbial “punch bowl” in place but continues to spike the punch albeit at a decreasing rate. I believe this “verbal intervention” will likely continue in the coming day and weeks as FED members attempt to clarify the “dovishness” of the FED’s stance.

Another Auto Analogy
As mentioned in last weeks Viewpoint, Chairman Bernanke used an auto analogy to try and lay out the FED’s thought process. Bernanke stated “If the incoming data supports the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases. However, any need to consider applying the brakes by raising short-term rates is still far in the future.”

This past week other auto analogies were bantered about in the media in an effort to add some further clarity on the FED’s stance. Here’s one variation; The FED is currently driving at 85 miles per hour (read - buying $85B per month in fixed income instruments), even if they slow down to 60mph (i.e. $60B/month) it still doesn’t make sense to open the door and jump out of the car.

In other words what has been the key for the risk markets has been the expansion of the FED’s balance sheet. Even with tapering, the expansion will continue for the foreseeable future, just at a lesser pace. FED speakers last week made every attempt to pound this message home and assuming by the sharp rebound in the equity markets, it may be starting to sink in.

Economy Moving Ahead
Meanwhile the bulk of economic data last week suggested the economy remains on firm footing. Pending Home Sales jumped by a better than expected 6.7% in May and are now up 12.5% on a year-over year basis. On the labor front, the Labor Department reported that initial jobless claims during the week ended June 22 fell 9K to 346K. The Commerce Department reported that personal spending in May rose by 0.3% while personal income rose by a better than expected 0.5% The “core” PCE—the FED’s preferred inflation barometer—rose 0.1% during the month and is up a very muted 1.1% on a year-over-year basis. The Commerce Department also reported that durable goods orders during the month of May rose by 3.6% solidly better than the 3.0% gain expected by economists. Excluding the volatile transportation component, durables rose 0.7% also better than expectations. The capital goods non-defense (ex-aircraft) component of the report—which is used as a proxy for business spending—rose 1.7%. With expectations of FED tapering seemingly baked into the cake and the market transitioning to a fundamentally driven one (versus a liquidity driven one), positive economic data was once again viewed as supportive.

The Week Ahead
The economic calendar will take center stage during the holiday shortened week (note: U.S. stock exchanges will close at 1:00ET on Wednesday and will be closed on Thursday in observance of Independence Day. Both the stock and bond markets will operate on normal hours on Friday). The focal report for the week will be the June Payroll data on Friday. According to Bloomberg nonfarm payrolls are expected to rise by 165K while the unemployment rate is forecast to dip to 7.5% (from 7.6%). Private payrolls—which filter out government hiring/firing—are expected to gain 175K. Other economic reports of interest include the ISM manufacturing index, May factory orders, the June ADP Employment Report, the ISM non-manufacturing (services) index and weekly initial jobless claims. On the global front, investors are expected to keep an eye on China’s manufacturing purchasing managers index for June on Monday and Thursday’s meeting of the European Central Bank.


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.

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.

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 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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