Markets Stuck in a Near Term Holding Pattern

The major market indices finished the week mostly higher.

October 24, 2016    |    By Mike Schwager

Performance for Week Ending 10/21/16:

The Dow Jones Industrial Average (Dow) added 0.04%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.43%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.38% and the Nasdaq Composite Index (NASDAQ) tacked on 0.83%. Sector performance was positive with 8 of the 11 S&P sector groups finishing higher. The Materials sector (+1.58%) was the best performer while Telecom (-3.80%) was the worst.

Index* Closing Price 10/21/2016 Percentage Change for Week Ending 10/21/2016 Year-to-Date Percentage Change Through 10/21/2016
Dow 18145.71 +0.04% +4.14%
Wilshire 5000 22264.26 +0.43% +5.18%
S&P 500 2141.16 +0.38% +4.76%
NASDAQ 5257.40 +0.83% +4.99%

*See below for Index Definitions

MARKET OBSERVATIONS: 10/17/16 – 10/21/2016

The major market indices finished the week mostly higher. Trading, however, was very choppy with stocks see-sawed between gains and losses throughout the week as investors juggled mixed earnings and economic reports, the final Presidential debate, volatility in oil prices, and the growing likelihood the Federal Reserve will hike interest rates at its December meeting. The S&P has made little headway since mid-September as election and rate hike concerns have kept many investors close to the sidelines.

On the earnings front, despite some high profiles misses, overall earnings are trending at a much better than feared pace. Through Friday, 116 members of the S&P have released results with over 80% exceeding expectations. While it is still early in the reporting season, earnings for the S&P are tracking at a +3.8% growth rate, solidly ahead of the 1.6% decline forecast by analysts at the start of earnings season.

Odds of a rate hike at the December Federal Open Market Committee (FOMC) meeting continue to inch higher and currently stand at over 69%, up sharply from mid-September. Guggenheim believes the Fed will hike by a quarter percentage point at the meeting followed by two additional rate hikes in 2017. The path higher is still expected to be very gradual which in turn, should leave monetary policy in a position to support risk assets.

The growing likelihood that the Fed will tighten policy by year-end has resulted in a rotation out of the interest rate sensitive sectors into some of the more cyclical/growth sectors. Since August 1 the Utility, Telecom and REIT sectors have significantly underperformed the broader market due to their sensitivity to higher rates and their elevated valuations to boot. On the flipside, Energy, Technology and Financials have posted solid gains during the period. While a rate hike in December has become the consensus view, a growing risk for the defensive/interest rate sensitive areas of the market would be an upward adjustment in the Fed’s “dot plot” (i.e. a projected higher/faster path forward) if the economy gathers additional momentum.

Economic Roundup – Mixed Bag: Recent economic data has been mixed although still suggesting that the economy is moving in the right direction. On the manufacturing side, the New York Fed reported that manufacturing activity in the greater NY area contracted for the third straight month while the Philadelphia Federal Reserve reported that business conditions in the greater-Philly area expanded at a modestly slower pace. The Labor Department reported that Consumer Prices (CPI) during the month of September rose 0.3%, on target with economists’ expectations and the fastest pace in five months. Lastly, the Commerce Department reported that housing starts during the month of September fell 9.0% to an annualized pace of 1047K units, moderately below the 1175K units expected by economists. Building Permits—which tend to be a proxy of future construction—jumped 6.3% and were solidly ahead of expectations.

Market View – Stay the Course: While volatility is likely to stay elevated into next month’s Presidential election, the path of least resistance over the coming months should continue to be skewed to the upside. While a pullback in stock prices certainly cannot be ruled out, a correction in prices would be viewed as healthy as it would help relieve some of the “froth” in the market and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continued to strengthen, the likelihood of a recession remains relatively low, earnings growth is set to accelerate in the coming quarters and interest rates policy is expected to remain supportive of risk assets for the foreseeable future.

The Week Ahead: Earnings reports will take center stage in the coming week with over 170 members of the S&P 500 scheduled to release results. Amongst this group will be 12 members of the Dow Jones Industrial Average. The economic calendar will also be watched closely. Reports of interest include the August S&P/Case-Shiller home price index, the Conference Board’s October consumer confidence survey, September new home sales, September durable goods orders and the first estimate of third-quarter GDP. Four Federal Reserve officials will make public appearances including New York president Bill Dudley, St. Louis president James Bullard, Chicago president Charles Evans and Fed Governor Jerome Powell.


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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