Markets Trip as Fall Begins

Performance for Week Ending 9/21/12: The Dow Jones Industrial Average (Dow) fell 0.10%,the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.58%, the Standard & Poor’s 500® Index (S&P 500) declined by 0.38% and the NASDAQ Composite Index (NASDAQ) shed 0.13%. Sector breadth was negative as 7 ...

September 24, 2012    |    By Mike Schwager

Performance for Week Ending 9/21/12:

The Dow Jones Industrial Average (Dow) fell 0.10%,the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.58%, the Standard & Poor’s 500® Index (S&P 500) declined by 0.38% and the NASDAQ Composite Index (NASDAQ) shed 0.13%. Sector breadth was negative as 7 of the 10 S&P sector groups finished lower. The Financials sector (-2.42%) was the worst performer while the Telecom sector (+2.40%) was the best.

Index* Closing Price 9/21/12 Percentage Change for Week Ending 9/21/12 Year-to-Date Percentage Change Through 9/21/12





Wilshire 5000




S&P 500









*See Last Page for Index Definitions

MARKET OBSERVATIONS: 9/17/12 - 9/21/12

The major market indices finished the week little changed.  Following a solid rally since early June, the markets may be on the verge of entering into a period of “price discovery” where investors try to gauge what has been discounted in the markets and what is likely to come to fruition.  The recent policy-induced optimism seems to be starting to fade as economic reality sets in. Last week’s batch of weaker than expected global manufacturing data was a stark reminder that changes in monetary policy tend to act with a significant lag. 

Also adding to the cautious tone were worries over the upcoming third quarter earnings season which kicks off in earnest on October 9. According to Bloomberg, analysts are expecting quarterly earnings to decline for the first time since the third quarter of 2009. In addition, as pointed out last week in the New York Times, so far, 88 companies have preannounced negative earnings guidance while only 21 companies have raised guidance. This 4:1 ratio of negative to positive preannouncements compares to the long-term average of 2 to 1.  Paradoxically, when negative preannouncements have been well above the mean, the market during peak reporting month (October, in this case) has actually posted solid gains.  In other words, when negative preannouncements are high, the bar heading into earnings season typically gets set very low, and therefore allows for companies to potentially surprise on the upside.   

The markets are likely to remain in a choppy sideways trading range in the near term as investors digest recent gains. Stocks have arguably already “prepaid” for the recent round of quantitative easing from the Federal Reserve (Fed) and therefore a turn in the economic and earnings data will likely be needed to push the markets to the next level.  With that said, near term downside risk will likely be limited as many professional investment managers have been underweight risk assets, which has led to widespread relative underperformance. According to a recent report by Goldman Sachs, only 11% of hedge funds are currently outperforming the S&P 500 on a year to-date basis.  As we approach the end of the third quarter, performance anxiety by professional money managers will likely foster a “buy the dip” mentality, and therefore keep pullbacks both short and shallow.  In addition with both the Fed and European Central Bank (ECB) moving to “all in” mode, it is generally tough to be too negative on the outlook for risk assets. 

The foundation for higher stock prices over the next several quarters is still very much in place. The economy is growing (albeit slowly), housing appears to have bottomed, auto sales have been solid, valuation levels are very reasonable and the combination of stable to rising/steady home prices coupled with the recent advance in financial assets, should bode well for consumer spending. While headwinds certainly do exist, the aggressive, open ended policy from the Fed should help cushion any adverse outcomes, in my opinion.

Economic Round-Up:
On the jobs front, the Labor Department reported that initial jobless claims during the week ended September 15 fell by 3K to 382K – moderately higher than the 372K expected by economists. The 4-week moving average, which helps smooth the week to week volatility, rose to 377.8K , the fifth straight weekly advance and the highest reading since late June. While the four-week remains solidly below the key 400K level, the recent  trend  is a bit concerning and may be suggesting that the recent progress in the labor market is beginning to stall. The housing market continues to show signs of stabilizing.   Last week the National Association of Realtors reported that existing home sales during the month of August jumped by a better than expected 7.8% to an annual rate of 4.82 million units.  In addition, the Commerce Department reported that building permits, which tend to be a leading indicator of future construction, came in at an annualized rate of 803K units, slightly ahead of the 796K estimate. The manufacturing sector appears stuck in a soft patch as measured by the Empire (NY) and Philadelphia regional manufacturing reports. Both reports showed manufacturing in their respective areas remained in contraction.

The Week Ahead:
This week’s economic calendar will be backend loaded with the bulk of the data due out on Thursday and Friday. Reports of interest include several updates on the housing sector, consumer confidence, the final revision to the second quarter GDP, durable goods orders and jobless claims. Third quarter earnings season will remain on the back burner for a couple more weeks. In the interim investors will pay close attention to earnings guidance from company management, with a particular focus on how slowing global growth is impacting business conditions. After nearly a dozen appearances in the prior week, only three speeches by Fed presidents are scheduled for this week.


I continue to believe that the U.S. equity markets remain well positioned for positive performance over the course of the next few quarters especially relative to cash and safe-haven Treasury bonds. This upbeat view reflects the markets attractive valuation, the overall healthy nature of corporate balance sheets, the recovering (albeit modestly) economy, expectations that corporate profits will remain favorable, and the pledge from the Federal Reserve that monetary policy will remain accommodative through at least mid-2015. In light of these favorable dynamics, I continue to believe that bouts of market weakness represent an attractive entry point, especially for longer-term investors.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


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.


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