/perspectives/weekly-viewpoint/markets-struggle-for-a-second-straight-week

Markets Struggle for a Second Straight Week

The Dow Jones Industrial Average (Dow) fell 2.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.17%, the Standard & Poor’s 500® Index (S&P 500) dipped 2.10% and the NASDAQ Composite Index (NASDAQ) shed...

August 19, 2013    |    By Mike Schwager

Performance for Week Ending 8/16/13:

The Dow Jones Industrial Average (Dow) fell 2.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.17%, the Standard & Poor’s 500® Index (S&P 500) dipped 2.10% and the NASDAQ Composite Index (NASDAQ) shed 1.57%. Sector breadth was negative as all 10 of the S&P sector groups finished lower. The Utilities sector (-4.36%) led the way lower followed by Consumer Discretionary (-3.29%) and Consumer Staples (-3.19%).

Index* Closing Price 8/16/2013 Percentage Change for Week Ending 8/16/2013 Year-to-Date Percentage Change Through 8/16/2013

Dow

15081.47

-2.23%

+15.09%

Wilshire 5000

17221.57

-2.17%

+16.68%

S&P 500

1655.83

-2.10%

+16.10%

NASDAQ

3602.78

-1.57%

+19.32%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 8/12/13 - 8/16/13

The major market indices finished lower for a second straight week reflecting the increased likelihood of a September “tapering” by the Federal Reserve (FED), lowered forward guidance from Dow-component Wal-Mart, and rising geopolitical tensions in Egypt. The lowered expectations from Wal-Mart were particularly worrisome as the company is viewed as a bellwether of consumer sentiment. To wit, on Friday the University of Michigan reported that their closely watched index of consumer sentiment unexpectedly dropped in August, dragged lower by the future expectations component.

Adding to the negative tone last week was the reduced levels of liquidity due to seasonal headwinds. Mid-August marks the belly of the summer doldrums when Wall Street bigwigs head off to the sandy shores of the Hamptons. At this time of year trading desks are typically half staffed with specific instructions to “not lose money.” As such, the sell-off may have been exaggerated a bit and the anemic trading volumes over the course of the week may be more of an indication of a ‘buyer’s strike’ versus a transition to a longer lasting downturn. 

Following a strong run over the first half of the year, investors have seemingly hit the pause button on the markets as they await clarity on the FED’s bond buying initiatives and signs of further progress in the economic recovery. As mentioned in these missives, the market is currently shifting from a liquidity driven to a fundamentally driven phase; however the recent signs of lackluster economic and earnings growth seem to be creating some uncertainty as to where we are in this transition. According to a recent report from ISI Research, in the face of continued slow growth and low inflation, they opined that the FED may be considering a “tapering-lite” approach. This could include tapering by a smaller-than-expected amount; signaling a “one and done” move; and/or delaying tapering by a few months.

Regardless of the noise surrounding tapering, the end to the FED’s bond buying program is inevitable, and therefore we need to keep in mind that the FED’s decision to lessen the pace of bond buying will ultimately be due to signs that the economic recovery is gaining traction. As such, weakness associated with tapering related jitters should prove temporary. Unfortunately, as the market discounts a reduced level of quantitative easing, other issues are likely to move into the spotlight. These include the battle over the 2014 budget, speculation over the appointment of the next Federal Reserve Chairman and how the recent back up in mortgage rates impacts the housing market recovery.

Bottom line: Trading is likely to remain choppy as the markets become more data/news driven leading up to the September 17/18 Federal Open Market Committee (FOMC) meeting. While the near-term outlook for the markets remains somewhat cloudy, the longer-term view of U.S. equities is bullish with the potential for 30-40 percent upside from current levels within the next two to three years.

The Week Ahead
The economic calendar is relatively light during the upcoming week. Focal points include the release of the minutes from the late-July FOMC meeting, July existing home sales data, initial jobless claims and new home sales data for July. Second-quarter earnings season continues to wind down with fewer than 20 S&P 500 members left to report. During the upcoming week Dow-components Home Depot and Hewlett-Packard are both scheduled to release results. Updates from FED Heads will also be at a minimum with only Dallas FED President Fisher scheduled to speak on Thursday. Also of note will be the kick-off of the annual Kansas City Federal Reserve Bank's Economic Symposium in Jackson Hole, Wyoming, which is scheduled to take place Friday through Saturday. While this event tends to feature the who’s who of the global economic world, this year may be better known for the number of no-shows. Absent from this year’s conference will be FED Chairman Bernanke,  Bank of England Governor Mark Carney and European Central Bank President Mario Draghi.


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.

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 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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