/perspectives/weekly-viewpoint/rebound-in-payrolls-sparks-a-week-end-rally

Rebound in Payrolls Sparks a Week End Rally

The Dow Jones Industrial Average (Dow) added 0.93%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.36%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.37% and the Nasdaq Composite Index (NASDAQ) finished little changed. p>

May 11, 2015    |    By Mike Schwager

Performance for Week Ending 5/8/15:

The Dow Jones Industrial Average (Dow) added 0.93%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.36%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.37% and the Nasdaq Composite Index (NASDAQ) finished little changed. Sector breadth was mixed with 6 of the S&P sector groups finishing higher and 4 finishing lower. The Financials (+1.59%) was the best performer for the week while the Telcom sector (-1.44%) was the laggard.

Index* Closing Price 5/8/15 Percentage Change for Week Ending 5/8/15 Year-to-Date Percentage Change Through 5/8/15

Dow

18191.11

+0.93%

+2.06%

Wilshire 5000

21916.79

+0.36%

+2.95%

S&P 500

2116.10

+0.37%

+2.78%

NASDAQ

5003.55

-0.04%

+5.65%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 5/4/15-5/8/15

The major market indices finished the week mostly higher as stocks staged a relief rally in the final session following the “goldilocks” payroll data (not too hot, not too cold). After last month’s weaker than expected payroll report, concern has been growing that lingering economic weakness during the first quarter could carry-over into the current quarter. The payroll report, as suggested by the strong market reaction, threaded the needle perfectly and helped alleviate those fears. As noted in past Viewpoints, the weakness during the first quarter was likely to prove transitory as the impact of adverse weather conditions and the West Coast port strike faded.

April Payrolls Rebound: On Friday, the Labor Department reported that the US economy added 223K nonfarm jobs during the month of April, a solid snapback from the 85K jobs added during March. The unemployment rate dipped to 5.4% (from 5.5%) and now stands at the lowest level since May 2008. While job growth improved, wage growth remained fairly muted. During April average hourly earnings rose 0.1% or 2.2% on a year-over-year basis. The report suggests that we are likely moving beyond the first quarter economic “soft patch” although the data is not likely robust enough to alter market expectations about the timing of a Fed rate hike (September) and the pace of the rate hike cycle (very gradual).

Investor Sentiment Remains Muted: The American Association of Individual Investors (AAII) recently reported that Bullish sentiment in the most recent period fell to 27% (lowest since April 2013) while Bearish sentiment came in at 26.8%. Interestingly, Neutral sentiment has been moving higher over the past several weeks and currently stands at 46.1%. The surge in Neutral sentiment suggests a high level of uncertainty in the market place as investors ponder Fed policy, the outlook for the global economy, current valuation levels, and concerns over whether companies will be able to deliver sustainable earnings growth. This perhaps explains why the markets have more or less been stuck in a “holding pattern” since early February.

The muted level of bullish sentiment also likely accounts for the year-to-date outflows from domestic equity mutual funds. According to the Investment Company Institute (ICI) outflows from domestic funds totaled $22.2 billion through April 29. Bond funds on the other hand have seen inflows of over $40 billion during the same time frame.

First quarter U.S. earnings season continues to wind down. Through Friday, 448 members of the S&P 500 have now reported results with nearly 68% surprising to the upside. Overall reported earnings for the S&P are currently UP 0.3%, solidly better than the expected 5%-plus decline at the start of reporting season. Nevertheless, concern about the strength of Q2 earnings growth remains elevated reflecting the high level of negative forward guidance that occurred during the first quarter reporting season. According to Bloomberg, second quarter earnings are currently forecast to decline by 6.1%.

The Week Ahead: The focal point of this week’s economic calendar will be Wednesday’s release of the April Retail Sales report. The report is being viewed as a critical test of the underlying vigor of the US economy as weather related issues that plagued growth during the first quarter should no longer be a factor. If consumer demand fails to rebound, this may be viewed as red flag in terms of the economy’s broader growth outlook. Other economic reports of interest include the March Job Openings and Labor Turnover Survey (one of Fed Chair Yellen’s favorite indicators), the April Producer Price Index, April industrial production and capacity utilization, the University of Michigan’s preliminary consumer sentiment survey and the May Empire State Manufacturing Survey. Fewer than 20 members of the S&P 500 will report as earnings during the week including Dow component Cisco Systems on Wednesday. The Fed speaking calendar will be relatively quiet with only San Francisco Fed President John Williams scheduled to present on Tuesday.


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.

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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