Outlook Still Favorable Despite Setback

The Dow Jones Industrial Average (Dow) fell 0.73%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.19%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.90% and the NASDAQ Composite Index (NASDAQ) closed down 1.57%.

July 14, 2014    |    By Mike Schwager

Performance for Week Ending 7/11/14:

The Dow Jones Industrial Average (Dow) fell 0.73%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 1.19%, the Standard & Poor’s 500® Index (S&P 500) finished off 0.90% and the NASDAQ Composite Index (NASDAQ) closed down 1.57%. Sector breadth was negative as 7 of the 10 S&P sector groups finished lower. The Utilities sector (+0.79%) was the best performer while Energy (-1.80%) was the worst.

Index* Closing Price 7/11/14 Percentage Change for Week Ending 7/11/14 Year-to-Date Percentage Change Through 7/11/14





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 7/7/14 - 7/11/14

The major market indices finished the week lower as investors booked gains following the recent run to record highs. Concerns over the financial stability of the Portuguese banking sector as well as the pace of global economic growth also weighed on sentiment.  After rallying almost 10% since the mid-April lows the market had become ‘overbought’ and was in need of a breather. Stocks aren’t linear assets and generally don’t move in straight lines. While last week’s action was nerve-wracking, it’s worth noting that the S&P 500 is down less than 1% from the record highs reached on July 3rd.

With that said, the narrative hasn’t changed: The macro environment over the next couple quarters is expected to remain supportive of further gains in the equity market. The U.S. economy looks poised to gather momentum over the next few quarters, the labor markets continue to recover, corporate earnings are likely to post solid gains both this year and next, inflationary pressure should remain muted and monetary policy is expected to remain loose through most of 2015. In addition, corporate balance sheets are in very good shape, confidence among corporate CEO’s continues to improve and should result in a pickup in investment spending during the second half of the year, and the housing market should benefit from a pickup in household formations. On the valuation front, the S&P is selling at 14.9x 2015 estimates; while not cheap, the market is certainly not ‘bubbly’ either.

FOMC Meeting Minutes:
The meeting minutes from the June Federal Open Market Committee (FOMC) meeting were released last week and they provided some clarity into the wrapping up of the quantitative easing program. The minutes indicated that tapering of the bond buying program will essentially remain on autopilot with $10B in reductions at each of the next two meetings followed by a final $15B reduction at the October gathering. As stated in the minutes: “participants generally agreed that if incoming information continued to support its expectation of improvement in labor market conditions and a return of inflation toward its longer-run objective, it would be appropriate to complete asset purchases with a $15 billion reduction in the pace of purchases … following the October meeting.” The statement suggests the Committee is confident enough in their economic assessment to signal the end of the bond buying initiative. The Committee also reiterated that rates would likely be maintained at current levels for a “considerable time” after the asset purchase program ends, especially if projected inflation continued to run below the 2% longer-run goal. In addition, the minutes stated that “even after employment and inflation are near mandate-consistent levels, economic conditions may, for some time, warrant keeping the target federal funds rate below levels the Committee views as normal in the longer run.”

Earnings Season:
Last week’s solid kick-off to second quarter earnings season offered little support to the market. Through Friday, 27 members of the S&P 500 have reported quarterly results with overall earnings up by 8.6% (ex the Financials sector earnings are up 11.6%). Of the 27 companies, 55% have beaten expectations while 33% have fallen short. While it’s very early in the reporting season, the current “beat” rate sits moderately below the long-term average of 63%. For the quarter, analysts are expecting S&P 500 earnings to rise by 4.5% while revenues are forecast to expand by 3%. On the sector level, Energy and Telecom are forecast to post the best growth while Financials are expected to see a modest decline.

The Week Ahead:

The earnings calendar will move to the front burner during the upcoming week as 58 members of the S&P 500 are scheduled to report results, including seven members of the Dow Jones Industrial Average. The focal points of the economic calendar will be reports on retail sales, housing (National Association of Home Builders' Housing Market Index, June housing starts and building permits) and regional manufacturing (July NY Empire State Manufacturing Index, July Philadelphia Fed Survey). Other reports of note include the preliminary University of Michigan's Consumer Sentiment Index, the June Producer Price Index (PPI), and industrial production for June.  In addition, the periodic Federal Beige Book will be released on Wednesday. Federal Reserve Chair Janet Yellen will give her semiannual monetary policy testimony to Senate and House committees on Tuesday and Wednesday, respectively. St. Louis president James Bullard is also scheduled to speak on Thursday.


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.

NAHB/Wells Fargo Housing Market Index is an index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.

NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.

Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.

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.

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.

The Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting.

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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