/perspectives/weekly-viewpoint/markets-start-the-new-year-on-a-down-note

Markets Start the New Year on a Down Note

The Dow Jones Industrial Average (Dow) lost 0.54%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.68%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.65% and the NASDAQ Composite Index (NASDAQ) shed 0.48%.  

January 12, 2015    |    By Mike Schwager

Performance for Week Ending 1/9/15:

The Dow Jones Industrial Average (Dow) lost 0.54%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.68%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.65% and the NASDAQ Composite Index (NASDAQ) shed 0.48%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Energy sector (-3.6%) led the way followed by Financials (-2.42%) and Industrials (-2.03%).

Index* Closing Price 1/9/15 Percentage Change for Week Ending 1/9/15 Year-to-Date Percentage Change Through 1/9/15

Dow

17737.37

-0.54%

-0.48%

Wilshire 5000

21134.66

-0.68%

-0.73%

S&P 500

2044.81

-0.65%

-0.68%

NASDAQ

4704.07

-0.48%

-0.68%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 1/5/15-1/9/15

We enter the New Year with a host of uncertainty. While the U.S. economy looks to be on firm footing, Europe appears to be on the brink of recession, China is grappling with slowing growth, and Japan seems to be marred in uncertainty surrounding the effectiveness of Abenomics. The decline in oil prices is also being viewed as a mixed blessing. While lower oil and gasoline prices should be a net positive for consumers, the impact of lower prices on capital spending, energy related employment, and energy sector earnings are worrisome. Lower oil prices could also lead to geopolitical uncertainty and social unrest as “rogue” energy exporting countries experience budget shortfalls, which in turn could lead to defunding of social programs.

How all this plays out over the course of the year remains unclear, however, one thing that seems certain is the return of volatility. This was very evident last week as the markets see-sawed between large gains and losses throughout the week. There’s an old Wall Street adage that says stocks tend to climb a “wall of worry.” - Let’s hope this rings true.

Payroll Report – Mixed Bag:
On Friday, the U.S. Labor Department reported that the nonfarm payrolls rose by a better than expected 252K in December while the prior two months were revised upward, resulting in an additional 50K jobs created. Collectively, 2.95 million jobs were added during 2014, the best year for job creation since 1999. While the growth in jobs was very impressive, the increase in salaries was anything but. During December wages fell by 0.2%, leaving year-over-year wage growth at a paltry 1.7%. The Federal Reserve (Fed) has consistently cited the importance of wage growth and the lackluster reading in December suggests that labor market conditions have not tightened enough to force employers to increase pay. The disappointing downtick in wages suggests the Fed will remain “patient” in terms of the timing of rate lift-off. 

FOMC Meeting Minutes:
The Fed released the meeting minutes from their December Federal Open Market Committee (FOMC) gathering last week. The much anticipated release was met with a yawn as the minutes contained little in the way of new news. One interesting highlight of the minutes was the committee’s discussion on global economic weakness and the potential impact on domestic growth.

According to the minutes many participants thought that a further deterioration in the foreign economic situation could result in slower domestic economic growth than they currently expected. From there they seemingly endorsed further monetary action by global central banks, saying that weak economic growth abroad could persist “if foreign policy responses were insufficient.”  The European Central Bank (ECB) is set to meet on January 22 and expectations are almost universal that additional policy initiatives (quantitative easing) will be introduced. ECB President Draghi has been “talking the talk” for quite some time and investors now expect him to “walk the walk.” If the ECB fails to deliver, an adverse reaction in the global markets seems very likely – stay tuned.

The Week Ahead:
The earnings calendar will move to the front burner as fourth quarter earnings season “officially” kicks off in the upcoming week. While only 20 members of the S&P 500 are scheduled to report, several bellwethers are amongst this group, including JPMorgan Chase, Intel Corp., Alcoa, Wells Fargo & Co., Bank of America, Citigroup, Goldman Sachs and Morgan Stanley. The economic calendar will also be weighty with the focal reports being  December retail sales, the Federal Reserve Beige Book, the December Producer Price Index, the January Empire State manufacturing survey,  the January Philadelphia Federal survey, December Consumer Price Index, December industrial production and capacity utilization, and the preliminary University of Michigan consumer sentiment survey. Fed Heads will be busy during the week with at least 5 speeches on the docket.


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.

Producer Price Index- PPI- is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.

NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.

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.

Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.

Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.

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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