/perspectives/weekly-viewpoint/rally-stalls-on-profit-drought

Rally Stalls on Profit Drought

The major market indices finished the week lower as investors digested some of the markets recent gains. Prompting the round of profit taking was a batch of mixed earnings reports from a handful of leading Technology firms, disappointment that the Bank of Japan left its monetary stimulus program unchanged, a report highlighting sluggish US first quarter economic growth, and a mixed update from the Federal Reserve.

May 02, 2016    |    By Mike Schwager

Performance for Week Ending 4/29/2016:

The Dow Jones Industrial Average (Dow) gained 0.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.74%, the Standard & Poor’s 500 Index (S&P 500) closed up 0.52% and the Nasdaq Composite Index (NASDAQ) dipped 0.65%. Sector breadth was mixed with 5 of the S&P sector groups finishing higher and 5 finishing lower. The Energy sector (+5.2%) led on the upside while the Utilities sector (-3.23%) was the laggard.

Index* Closing Price 4/29/2016 Percentage Change for Week Ending 4/29/2016 Year-to-Date Percentage Change Through 4/29/2016
Dow 17773.64 -1.28% +2.00%
Wilshire 5000 21377.59 -1.13% +0.99%
S&P 500 2065.30 -1.26% +1.05%
NASDAQ 4775.36 -2.67% -4.63%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 4/25/16 – 4/29/16

The major market indices finished the week lower as investors digested some of the markets recent gains. Prompting the round of profit taking was a batch of mixed earnings reports from a handful of leading Technology firms, disappointment that the Bank of Japan left its monetary stimulus program unchanged, a report highlighting sluggish US first quarter economic growth, and a mixed update from the Federal Reserve. For the month of April, the broader indices finished mixed with the S&P producing a total return of +0.39%, the Dow gaining +0.62% and the tech-heavy Nasdaq Composite losing nearly 1.89%.

Fed Meeting: As expected, the Federal Open Market Committee (FOMC) left interest rate policy unchanged at the conclusion of last week’s meeting. The after meeting communique eliminated the statement that "global economic and financial developments continue to pose risks." With stock markets almost back to record highs, commodity prices rebounding, the dollar and corporate bond yields down sharply and incoming data indicating that China's economic growth accelerated in the first quarter, the change seemed justified. The updated statement also noted that 'labor market conditions have improved further even as growth in economic activity appears to have slowed'. The statement singled out slowing consumption growth, but went on to suggest that the fundamentals for household spending remain strong. Overall the changes seems to leave the door open for a hike at the June meeting, however any change but policy will likely depend on the tone of the data reported between now and the June meeting. The market is currently discounting only a 14% probability of a rate hike at the meeting.

Earnings Roundup: With earnings season more than half way over, first quarter results have been lackluster, but certainly better than feared. Through Friday, 310 members of the S&P have reported with 77% surprising to the upside. According to Bloomberg, the average upside surprise was just over 4%. Overall, S&P earnings are tracking down almost 9% while revenues have declined by 2.4%. If current numbers play out through to the end of earnings season, the S&P will have posted three consecutive quarterly declines.

Economic Data – Another Mixed Bag: The Commerce Department reported that the initial estimate of first quarter GDP showed the economy expanding by just 0.5%, slightly below economists forecast for a 0.7% gain and down from the 1.4% pace in the fourth quarter. Personal Consumption fared a bit better by rising 1.9%, modestly above the 1.7% estimate. Over the past several years a seasonal pattern to GDP growth has developed where weak first quarter growth has been followed by a strong rebound in the second quarter. According to the updated Atlanta Fed GDP Now model Q2 growth is currently forecast to rebound to 1.8%.

Layoffs remain at rock bottom rates as suggested by weekly jobless claims which remained just off the lowest level in four decades. On the housing front, the National Association of Realtors reported that pending home sales rose 1.4% in March to a 10-month high and solidly above the consensus estimate for a 0.5% gain. The better than expected increase suggests the spring home buying season is off to a good start. The Conference Board’s Consumer Confidence Index fell in April, as consumers grew wearier about the near-term outlook. Durable goods orders rose 0.8% during March, below expectations of a 1.7% increase. Excluding the volatile transportation component, orders fell 0.2%.

The Week Ahead: First-quarter earnings season will remain busy, with 126 members of the S&P 500 scheduled to report. Included in this group are Dow Jones components Pfizer and Merck & Co. The focal point of the data calendar will be the monthly Payroll report on Friday. According to Bloomberg, non-farm payrolls are expected to expand by 200K and the unemployment rate is forecast to hang steady at 5.0%. Other reports of interest include the April ISM manufacturing survey, March construction spending, the April ADP Employment Report, and the first estimate of first-quarter productivity. Several Fed officials are scheduled to make public appearance this week, including; Atlanta Fed president Dennis Lockhart, San Francisco Fed president John Williams, Cleveland Fed president Loretta Mester, Minneapolis Fed president Neel Kashkari, St. Louis Fed president James Bullard and Dallas Fed president Robert Kaplan.

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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