/perspectives/weekly-viewpoint/post-brexit-rebound-continues

Post Brexit Rebound Continues

The major market indices finished the week higher, marking the fourth consecutive weekly gain for the S&P 500.

July 25, 2016    |    By Mike Schwager

Performance for Week Ending 7/22/16:

The Dow Jones Industrial Average (Dow) gained 0.29%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.68%, the Standard & Poor’s 500 Index (S&P 500) finished up 0.61% and the Nasdaq Composite Index (NASDAQ) tacked on 1.40%. Sector breadth was mixed with 6 of the S&P sector groups finishing higher and 4 finishing lower. The Technology sector (+2.02%) was the best performer while Energy (-1.31%) was the laggard.

Index* Closing Price 7/22/2016 Percentage Change for Week Ending 7/22/2016 Year-to-Date Percentage Change Through 7/22/2016
Dow 18570.85 +0.29% +6.58%
Wilshire 5000 22536.66 +0.68% +6.47%
S&P 500 2175.03 +0.61% +6.41%
NASDAQ 5100.16 +1.40% +1.85%

*See below for Index Definitions

 
MARKET OBSERVATIONS:7/18/16 – 7/22/16

The major market indices finished the week higher, marking the fourth consecutive weekly gain for the S&P 500.  The S&P has now tacked on over 8% since the post Brexit sell-off. Despite the weekly gains, trading turnover has been on the light side suggesting the recent rally may be starting to run on tired legs.  While a pullback in stock prices in the coming weeks certainly cannot be ruled out, a correction in prices would help relieve overbought conditions and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continue to improve, 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.  All in all, the path of least resistance for stocks through year-end should continue to be skewed to the upside.

Q2 Earnings – So Far, Better than Feared: Second quarter earnings season is off to a better than expected start and is likely one of the key drivers of recent market gains. According to Thomson Reuters, analysts now expect overall earnings of S&P 500 companies to decline 3.3% in the quarter, less than the 5%-plus drop estimated at the start of the earnings season. Bloomberg data shows that of the 125 S&P 500 companies that have reported through Friday, 82 percent have beaten earnings estimates with an average upside surprise of just over 6 percent. Top line growth has also been better than expected with 60 percent of companies beating forecasts.

The Week Ahead: The focal point of the coming week will be the two-day Federal Open Market Committee (FOMC) meeting on Tuesday and Wednesday.  While no changes in interest rate policy are expected, the tone of the meeting will be watched closely. The recent rebound in economic data and the limited fallout from the EU referendum could lead to a more ‘hawkish’ tone, which could raise the probability of a rate hike before year-end.  According to Bloomberg, the probability of a hike at the September meeting is 26% while the odds of a move in December stand at just under 47%. Quarterly earnings season will also be in focus with just under 200 members of the S&P 500 scheduled to report throughout the week. Included in this group are 12 members of the Dow Jones Industrial Average. The data calendar will also be busy.  Economic reports of interest include the May S&P Case-Shiller home price data, June new home sales, July consumer confidence report, June durable goods orders, the first estimate of second-quarter GDP, the Chicago purchasing manager’s index (PMI) for July and the University of Michigan’s  July consumer sentiment survey. Outside the United States, the Bank of Japan is scheduled to meet at the end of the 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.

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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