/perspectives/weekly-viewpoint/no-tapering-for-now

No Tapering -- For Now 

The Dow Jones Industrial Average (Dow) added 0.49%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.30%, the Standard & Poor’s 500® Index (S&P 500) rose 1.30% and the NASDAQ Composite Index (NASDAQ) tacked on ...

September 23, 2013    |    By Mike Schwager

Performance for Week Ending 9/20/13:

The Dow Jones Industrial Average (Dow) added 0.49%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.30%, the Standard & Poor’s 500® Index (S&P 500) rose 1.30% and the NASDAQ Composite Index (NASDAQ) tacked on 1.41%. Sector breadth was positive as all 10 of the S&P sector groups finished higher. The Industrials sector (+1.89%) led the way higher followed by Utilities (+1.82%) and Financials (+1.59%). 

 

Index* Closing Price 9/20/2013 Percentage Change for Week Ending 9/20/2013 Year-to-Date Percentage Change Through 9/20/2013

Dow

15451.09

+0.49%

+17.91%

Wilshire 5000

17815.55

+1.30%

+20.71%

S&P 500

1709.91

+1.30%

+19.89%

NASDAQ

3774.73

+1.41%

+25.01%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 9/16/13 - 9/20/13

The major market indices finished higher for a third straight week after the Federal Reserve (Fed) surprised the markets by postponing a reduction in their quantitative easing program. The inaction by the Fed pushed the S&P and Dow to new all time highs, although the “sugar high” induced by the Fed faded as the week progressed as both indices finished well off their best levels of the week.

At the conclusion of Wednesday’s Federal Open Market Committee (FOMC), the Fed decided to leave their $85 billion per month bond buying initiative intact, citing the need to see more evidence that the economic recovery is on a sustainable path. In addition, growing fiscal concerns and the risk that the recent jump in mortgage rates could slow the housing recovery were also mentioned.

Despite the favorable market reaction, the decision to do nothing creates a conundrum for investors. Over the past four months the Fed has telegraphed that a reduction in bond buying activity was forthcoming. After some near term shakiness following Bernanke’s initial hints of tapering in late-May, the market had come to grips that a reduction in bond buying was a foregone conclusion. While investors (wrongly, in this case) interpreted that to mean such a move was likely at the September meeting, the act of doing nothing, may result in investors questioning the Fed’s future communication. Since the Fed’s primary lever of monetary policy—the fed funds rate—is pegged at essentially zero, the central bank has relied on forward guidance (communication) as their primary monetary tool and that method may have lost some credibility.

In addition, Bernanke in prior updates seemed to lay out a specific time line for the Fed’s tapering activities, the latest statement however seemed to have thrown that out the window or at least muddied the waters. Bernanke said, while it’s possible the Fed will start tapering before the end of the year, he also stressed that there’s no fixed calendar schedule. Bernanke also reiterated that any decision to taper will be data dependent.  With the timing of tapering now unclear, the focus will shift to economic releases, especially ones relating to the labor market. This could result in increased market volatility as investors are bound to question whether good news will be viewed as good news, or will good news be viewed as bad news? In other words, signs that things are getting better, would likely mean that tapering comes sooner rather than later. While a strengthening economy suggests a better earnings environment (a positive for stocks), in the current “bizzaro” environment, investors may see this as a trigger to take some money off the table.

Potentially complicating matters in the upcoming weeks is the fiscal follies in Washington surrounding the budget ceiling, the still unresolved issues with Syria, and the kickoff to third quarter earnings season. Investors still have a lot of uncertainty to digest and some may choose to do this from the sidelines, especially with the market just off its all time high. While a “pause to refresh” could develop in the near term, on a longer term basis the outlook for equities remains favorable.

Octaper?
While the consensus amongst economists seems to be that tapering of quantitative easing will begin at the December FOMC meeting, on Friday St. Louis Fed President James Bullard said a small taper at the October FOMC meeting is possible depending on how the data shakes out between now and then. Bullard also gave some insight into last week’s FOMC meeting saying that the decision to stand pat was a “borderline decision.”  -- In other words a close call. Meanwhile, last week’s batch of economic data was relatively strong and a continuation of this trend would likely increase the odds that the Fed moves in October – stay tuned.

Summers out, Yellen in?
The other big news last week was that Larry Summers, considered to be the front runner to replace Fed Chairman Bernanke when his term expires in January, decided to withdraw his name from contention. The nomination process has become a political football in Washington and Summers appears to have felt his confirmation would be a long shot.

In a letter to President Obama, Summers wrote "I have reluctantly concluded that any possible confirmation process for me would be acrimonious and would not serve the interest of the Federal Reserve, the Administration or, ultimately, the interests of the nation's ongoing economic recovery."

The withdrawal of Summers and the potential nomination of current vice chairman Janet Yellen was applauded by the global markets as Summers is considered to have “hawkish” leanings, raising fear that he would be quick to wind down the Fed’s monetary stimulus efforts. Yellen, on the other hand, is considered to be very dovish and is expected to take a more gradual approach to reduce stimulus.

The Week Ahead
Economic data and Fed speakers will be the focus in the upcoming week. On the economic front, reports of interest include the July Case-Shiller Home Price Index, the Conference Board’s Consumer Confidence Index, August durable goods orders, new home and pending home sales data, and the final revision to the second-quarter GDP.  In addition, August personal income and spending and September University of Michigan consumer confidence survey will be watched closely. Several Fed Heads will make public appearances this week including; Atlanta president Dennis Lockhart, Cleveland president Sandra Pianalto, Kansas City president Esther George, Minneapolis president Narayana Kocherlakota, Chicago president Charles Evans, and New York president William Dudley. Investors will pay close attention to these speeches in search of clues to when tapering of the bond buying program may begin. Earnings are slowly coming back into focus with approximately 10 members of the S&P 500 scheduled to release results this week.  


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 University of Michigan Consumer Sentiment Index is a consumer confidence index published monthly by the University of Michigan. The Index is developed from 500 telephone interviews, which include 50 core questions, conducted each month of a United States sample which excludes Alaska and Hawaii. The Index of Consumer Sentiment (ICS) is developed from these interviews. Especially valued for its quick turnaround, the University of Michigan Confidence survey is considered one of the foremost indicators of U.S. consumer sentiment.

The S&P/Case-Shiller Home Price Indices measure the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

The Consumer Confidence Index (CCI) is an indicator designed to measure consumer confidence to that measures how optimistic or pessimistic consumers are with respect to the economy in the near future.  The Conference Board bases the measurement of this Index on a survey of 5,000 households.

The Conference Board is a not-for-profit organization that creates and communicates knowledge about management and the marketplace to help businesses strengthen their performance and better serve society. The Conference Board operates as a global independent membership organization working in the public interest. It publishes information and analysis, makes economics-based forecasts and assesses trends, and facilitates learning by creating dynamic communities of interest that bring together senior executives from around the world.

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 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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