/perspectives/weekly-viewpoint/new-highs-on-strong-payroll-growth

New Highs on Strong Payroll Growth

The major market indices finished the week mostly higher with both the S&P 500 and Dow closing at new all time highs. The gains in the broader markets were driven by further signs the U.S. economy is gathering momentum as well as increased speculation the European Central Bank (ECB) will embark on a full scale quantitative easing program early next year.

December 08, 2014    |    By Mike Schwager

Performance for Week Ending 12/5/14:

The Dow Jones Industrial Average (Dow) gained 0.73%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.33%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.38% and the NASDAQ Composite Index (NASDAQ) lost 0.23%. Sector breadth was mixed with 5 of the S&P sector groups finishing higher while 5 finished lower. The Financials sector (+1.77%) led on the upside while Telecom (-3.87%) was the biggest loser.

Index* Closing Price 12/5/14 Percentage Change for Week Ending 12/5/14 Year-to-Date Percentage Change Through 12/5/14

Dow

17958.79

+0.73%

+8.34%

Wilshire 5000

21404.68

+0.33%

+11.17%

S&P 500

2075.37

+0.38%

+12.28%

NASDAQ

4780.75

-0.23%

+14.47%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 12/1/2014-12/5/14

The major market indices finished the week mostly higher with both the S&P 500 and Dow closing at new all time highs. The gains in the broader markets were driven by further signs the U.S. economy is gathering momentum as well as increased speculation the European Central Bank (ECB) will embark on a full scale quantitative easing program early next year. The lackluster performance of the NASDAQ reflected a sell-off in the technology sector. The technology sector has been one of the better performing sectors on a year-to-date basis and investors appeared to be monetizing some of those gains.

Payroll Report
On Friday, the Labor Department reported that November nonfarm payrolls expanded by 321K – well above the 230K expected by economists and the best level since January 2012. In addition to the strong showing in November, there were net upward revisions of 44K to the October and September reports. The unemployment rate held steady at 5.8%. While job growth is very much welcome, the report was somewhat bittersweet, as  the strong showing increased fear that the Federal Reserve (Fed) could begin raising rates sooner than what is currently expected. The Fed’s next gathering is scheduled for December 16 & 17. While no changes in policy are expected to emerge from the meeting, there appears to be a growing likelihood that the central bank could turn a bit more hawkish and may drop the "considerable time" statement from their after meeting communiqué – stay tuned.

Economic/Fed Roundup
Initial jobless claims during the week ended November 29, fell 17K to 297K, in line with the 295K expected by economists. The 4-week moving average—which helps smooth the week to week volatility—rose to 299K during the period but remained below the 300K level for the twelfth consecutive week. Elsewhere, the Institute for Supply Management (ISM) manufacturing index came in at 58.7 in November down from a 59.0 during October, but ahead of the consensus forecast of 57.8 (note: reading above 50 signals expansion). The ISM also reported that their non-manufacturing (services) index rose to 59.3 in November, solidly outpacing the consensus forecast of 57.5. The reading left the index just shy of the August post-recession high of 59.6, and above the Q3 average of 59.0. The “guts” of the report were also encouraging with the forward looking new orders component rising to 61.4 while supplier deliveries jumped to 54.5. Monthly vehicle sales were also surprisingly strong last month, coming in at a seasonally adjusted annual rate of 17.2 million. Most automakers reported an uptick in SUV and truck sales citing the benefit from lower gasoline prices.

On the Fed front, New York Fed Chief Bill Dudley said growth in 2015 is unlikely to disappoint, nor astonish, and forecasts for a mid-year rate hike "seem reasonable." As for the recent big drop in energy prices, Dudley said it's a boon for the economy. Elsewhere, Fed Vice Chairman Stanley Fischer also stressed the positive impact on the U.S. economy from the steepest decline in oil prices for five years. “I’m not very worried,” Fischer told an audience at the Council on Foreign Relations. “The lower inflation that we’ll get from the lower price of oil is going to be temporary.” Fischer also said lower oil prices were “a phenomenon that’s making everybody better off.”

The Week Ahead:
Data and news flow will be relatively light in the coming week. On the earnings front, just four members of the S&P 500 are scheduled to report results. The economic calendar will also be light. Reports of interest include the October Job Openings and Labor Turnover Survey (JOLTS), November retail sales, October business inventories, the November Producer Price Index (PPI) and the preliminary University of Michigan’s December consumer sentiment survey.  In light of the traditional blackout period ahead of Fed meeting, the Fed speaking calendar is almost nonexistent with only Atlanta Federal Reserve president Dennis Lockhart scheduled to speak on Monday.


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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

Job Openings and Labor Turnover Survey is a survey done by the United States Bureau of Labor Statistics to help measure job vacancies. It collects data from employers including retailers, manufacturers and different offices each month. Respondents to the survey answer quantitative and qualitative questions about their businesses' employment, job openings, recruitment, hires and separations. The JOLTS data is published monthly and by region and industry.

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.

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.

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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