Rookie Gaffe or Freudian slip – Stay Tuned
The Dow Jones Industrial Average (Dow) gained 1.48%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.30%, the Standard & Poor’s 500® Index (S&P 500) rose 1.37% and the NASDAQ Composite Index (NASDAQ) tacked on ...
March 24, 2014
| By Mike Schwager
Performance for Week Ending 3/21/14:
The Dow Jones Industrial Average (Dow) gained 1.48%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.30%, the Standard & Poor’s 500® Index (S&P 500) rose 1.37% and the NASDAQ Composite Index (NASDAQ) tacked on 0.74%. Sector breadth was positive as 9 of the 10 S&P sector groups finished higher. The Telecom sector (+3.57%) led the way higher followed by Financials (+3.06%) and Technology (+2.36%).
||Closing Price 3/21/2014
||Percentage Change for Week Ending 3/21/2014
||Year-to-Date Percentage Change Through 3/21/2014
*See below for Index Definitions
MARKET OBSERVATIONS 3/17/14 - 3/21/14
The major market indices finished the week solidly higher as investors pushed geopolitical concerns to the backburner and focused on a batch of better than expected U.S. economic data. The renewed confidence in the economy’s vigor left the S&P 500® Index just shy of a new all time closing high.
On the geopolitical front, although sanctions were issued against Russia by both the U.S. and Eurozone, they were mostly shrugged off by the investment community as they appeared to be much less onerous than feared and were targeted at individuals rather than broader economic controls. Investors also breathed a sigh of relief after Russian President Putin said that Russia has no interest in expanding further into Ukraine; in other words, Crimea may be a “one and done” event (at least for now – stay tuned).
As expected, the Federal Open Market Committee (FOMC) announced another reduction in their bond buying program. The committee said they would taper the pace of asset purchases by $10 billion per month, to $55 billion. The Federal Reserve (Fed) cited the underlying strength in the broader economy and ongoing improvement in labor market conditions as the primary reasons for the reduction. The statement also said that they will likely continue to reduce the pace of asset purchase in further measured steps at future meetings. In other words, unless the economy goes off kilter, tapering appears to be on autopilot at a pace of $10 billion per meeting.
What seemed to have caught investors off guard was the suggestion that the committee may have quickened the expected pace of its rate hike cycle. During her first press conference as Fed Chairwoman, Yellen opined that the first rate hike could come “around 6-months” after the end of quantitative easing (QE). She also noted that the end of QE is likely to be the fall of this year, and hence implying a rate hike could come as soon as the spring of 2015, a bit sooner than many investors had anticipated.
While Yellen’s remarks threw the market into a tizzy, the markets regained their footing the following day after investors chalked up the comments as a “rookie gaffe.” Investors will now look for clarification (or confirmation) on her musings from the multiple Fed speakers that are set to take the podium over the coming days.
In the after meeting communiqué, the FOMC conveyed relatively little concern about soft recent economic data, saying that “growth in activity slowed during the winter months, in part reflecting adverse weather conditions.” It indicated it expects that “economic activity will expand at a moderate pace and labor market conditions will continue to improve gradually.” The Committee replaced the 6.5% unemployment rate threshold language by saying that “In determining how long to maintain the current 0-0.25% target range for the federal funds rate, the Committee will assess progress—both realized and expected—toward its objectives of maximum employment and 2 percent inflation.” In making the assessment of how long to keep rates unchanged, the Committee said it would “take into account a wide range of information, including measures of labor market conditions, indicators of inflation pressures and inflation expectations, and readings on financial developments.” The Committee also added a statement indicating 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.”
Economic reports last week suggested that a spring thaw may be occurring following the harsh winter weather that weighed on economic data earlier in the year. Regional manufacturing reports from both the New York and Philadelphia Federal Reserve’s expanded at a better than expected pace in March while a report from the Commerce Department showed building permits—which tend to be a leading indicator of future construction—jumped 7.7% to an 1018K annualized rate, well above analysts’ expectations. On the labor front, the Labor Department reported that the 4-week moving average of initial jobless claims—which helps smooth the week to week volatility—came in at 327K, the lowest level since late-November.
Macro Environment Remains Supportive
As mentioned recently in these missives – ultimately it is Fundamentals (the economy, earnings, interest rates) that drive the stock market – and in that regard, the macro environment – remains supportive of further gains.
- U.S. economic growth seems to be in a “goldilocks” phase (not too hot, not too cold) with consensus forecasts for full year growth settling in at around 3%. This level should be strong enough to continue to drive labor market growth, but not too strong that the Federal Reserve would consider hiking interest rates.
- The Labor markets are moving forward. After disappointing labor market reports in both December and January, the February payroll data came in much better than expected. In addition, most other labor statistics (ADP, ISM, Initial claims) – all argue that the labor markets continues to gain momentum.
- Corporate earnings continue to surprise to the upside. According to the Bloomberg consensus, earnings are likely to grow approximately 8-10% both this year and next.
- Inflation remains low and is not likely to move much above 2% in the foreseeable future. Low levels of inflation should be supportive of the markets valuation due to the inverse relationship. In fact, by historical standards, when inflation has been below 2%, the price to earnings (P/E) multiple on the S&P 500 has averaged close to 18 times trailing earnings versus the current 17 multiple.
The Week Ahead
The economic calendar and speeches from members of the Federal Reserve will be the focal points during the upcoming week. On the economic front, investors will get an updated look at the housing sector (CaseShiller Home Prices, FHFA Home Prices, New Home Sales, and Pending Home Sales) as well as the second revision to the fourth quarter GDP. Also of interest will be reports on consumer confidence and durable goods orders. Investors will also be looking for clarity on Fed Chairwoman Yellen’s comments as over a half dozen Fed Heads step up to the podium during the week.
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.
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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 gua rantees 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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