Risk Sentiment Improves Following ECB Action

The Dow Jones Industrial Average (Dow) gained 0.92%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.6%, the Standard & Poor’s 500® Index (S&P 500) finished up 1.6% and the NASDAQ Composite Index (NASDAQ) tacked on 2.66%.

January 26, 2015    |    By Mike Schwager

Performance for Week Ending 1/23/15:

The Dow Jones Industrial Average (Dow) gained 0.92%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.6%, the Standard & Poor’s 500® Index (S&P 500) finished up 1.6% and the NASDAQ Composite Index (NASDAQ) tacked on 2.66%. Sector breadth was positive with 9 of the 10 S&P sector groups finishing higher. The Technology sector (+3.11%) led the way followed by Industrials (+2.35%) and Consumer Discretionary (+1.71%). The Telecom sector was the sole laggard, finishing down 1.13%.

Index* Closing Price 1/23/15 Percentage Change for Week Ending 1/23/15 Year-to-Date Percentage Change Through 1/23/15





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 1/19/15-1/23/15

The major market indices finished the holiday shortened week solidly higher following the European Central Bank’s (ECB) decision to initiate a full scale quantitative easing (QE) program.  The move by the ECB sparked a global rally with nearly all the major international indices finishing the week higher. Adding to the positive sentiment was stimulus moves in Canada, Denmark, Turkey and China as well as better than expected Q4 earnings trends in the U.S.

ECB joins the QE Party
Expectations heading into Thursday’s ECB meeting were sky high, which in turn raised fears that the central bank could underwhelm investors. The opposite actually occurred with the ECB exceeding these lofty expectations. The central bank announced they will begin buying 60 billion euro of debt starting in March and continue through September of next year. Collectively, the program should expand the ECB’s balance sheet by 1.1 trillion euro over the period. The ECB also left the door open to doing more, if needed, by stating that the program will "be conducted until we see a sustained adjustment in the path of inflation.” In other words, if QE fails to push inflation towards the 2% target level, the program could continue beyond next September.  Being a believer that the reaction to the news is more important than the actual news, the ECB seemed to push all the right buttons; i.e. risk assets rallied, the euro weakened, and Eurozone bond yields declined.

While QE should not be viewed as a panacea for what ails the Eurozone and it remains debatable whether the ECB’s efforts will be enough to jumpstart the Eurozone economy in the near-term.  However, QE coupled with the declining euro (which should accelerate exports) and weaker energy costs should, at the very least, limit further damage. European risk assets have made a very big move over the past few weeks and may be subject to some near-term profit taking. With that said, if we use the initial QE program in the U.S. as a roadmap, European shares appear to be well positioned to outperform for the foreseeable future.

Q4 Earnings Roundup
Earnings expectations heading into the Q4 earnings season have been pared back significantly due to the negative impact of lower oil prices on Energy sector earnings as well as the headwind on multinational companies due to the sharp appreciation of the U.S. dollar. With the bar set very low, earnings, for the most part, have been surprising to the upside. Through Friday, 90 members of the S&P 500 have reported results with 70% beating expectations and just 19% missing estimates. Overall reported earnings for the S&P are down 0.2%, although this is being heavily skewed by weakness in the Financials sector. When Financials are excluded overall earnings are up a respectable 9.5%.

The Week Ahead:
The earnings calendar will be front and center in the upcoming week with upwards of 150 members of the S&P 500 scheduled to report. Included in this group will be 11 components of the Dow Jones Industrial Average. The other key event will be the two-day Federal Open Market Committee meeting which kicks-off on Tuesday. While no policy changes are expected to emerge from the gathering, investors will closely monitor the tone of the after meeting notes and Yellen press conference and look to see if the Federal Reserve maintains their pledge to remain “patient” in terms of rate hikes. On the economic front, key reports include December durable goods orders, the November S&P Case-Shiller home price index, December new home sales, the Conference Board’s January consumer confidence survey, the National Association of Realtors’ December pending home sales index and the first estimate of fourth-quarter GDP.


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.

S&P/Case-Shiller Home Price Indexes is a group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain metropolitan statistical areas (MSA) as well as a national index.

Pending Home Sales Index - PHSI is an index created by the National Association of Realtors (NAR) that tracks homes sales in which a contract is signed but the sale has not yet closed. The pending home sales index is a leading indicator of future existing home sales as it typically takes four to six weeks to close a sale after a contract has been signed.

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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