/perspectives/weekly-viewpoint/running-to-standstill

Running to Standstill

The Dow Jones Industrial Average (Dow) gained 0.12%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.8%, the Standard & Poor’s 500® Index (S&P 500) lost 0.48% and the NASDAQ Composite Index (NASDAQ) shed...

March 31, 2014    |    By Mike Schwager

Performance for Week Ending 3/28/14:

The Dow Jones Industrial Average (Dow) gained 0.12%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) fell 0.8%, the Standard & Poor’s 500® Index (S&P 500) lost 0.48% and the NASDAQ Composite Index (NASDAQ) shed 2.83%. Sector breadth was mixed with five S&P sector groups finishing higher and five finishing lower. The Energy sector (+2.52%) was the best performing while Consumer Discretionary (-2.10%) was the laggard.

 

Index* Closing Price 3/28/2014 Percentage Change for Week Ending 3/28/2014 Year-to-Date Percentage Change Through 3/28/2014

Dow

16323.06

+0.12%

-1.53%

Wilshire 5000

19375.34

-0.80%

+0.63%

S&P 500

1857.62

-0.48%

+0.50%

NASDAQ

4155.76

-2.83%

-0.50%

*See below for Index Definitions
 

MARKET OBSERVATIONS 3/24/14 - 3/28/14

The major market indices finished the week mixed as investors weighed the building momentum in the underlying U.S. economy against geopolitical fears and the prospects of reduced monetary stimulus. While the market is more or less flat on the year, trading action over the past several sessions is becoming a bit concerning. The recent pattern of early strength followed by late day weakness suggests the market may be getting a little tired. In addition, momentum stocks (biotech, internets) have been getting crushed, small cap stocks have been underperforming and defensive issues have been outperforming cyclicals. While quarter end portfolio jockeying may be at work, the market’s negative internals are something to keep a close eye on.

The sideways action so far this year has pushed “neutral” sentiment to the highest level since 2005. According to the American Association of Individual Investors (AAII), the percent of investors who are neutral on the markets outlook over the next six months has jumped to 40.2%. This compares to 31.2% who are Bullish and the 28.6% who are Bearish. The threat of fading monetary stimulus, rising geopolitical tensions, and little year-to-date progress seems to be keeping many investors on the sidelines.

It is also worth noting that 2014 marks a mid-term election year. According to Strategas Research, midterm election years going back to 1930 are typically characterized by choppy sideways trades during the first nine months of the year and are then followed by solid performance in the final few months. Political posturing and uncertainty going into the election usually keep investors close to the sidelines. Once the outcome to the election becomes clearer, investors are more likely to come back into the markets and position for the outcome. In other words, if history repeats itself, performance this year could be back end loaded.

While the market’s near-term outlook looks a bit unsettled, the intermediate to long term outlook continues to be supported by attractive macro fundamentals. 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 (Fed) would consider prematurely hiking interest rates. The labor markets continue to move 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 National Employment Report, ISM Manufacturing Index, 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 focal point in the upcoming week will be Friday’s monthly payroll report. According to Bloomberg, nonfarm payrolls are expected to rise by 200K while the unemployment rate is forecast to decline to 6.6% (from 6.7%). Private payrolls—which filter out government hiring/firing—are estimated to rise by 194K. Other economic reports of interest include the March ISM manufacturing index, February construction spending, February factory, and the ISM March non-manufacturing index.  First quarter earnings season kicks off in earnest this week with three members of the S&P 500 scheduled to release results. Due to harsh weather conditions for much of the quarter, analysts expectations are relatively muted with overall earnings on the S&P 500  expected to grow by 1.1% (down from 5.2% at the beginning of the year). Paradoxically, this could become a potential upside catalyst, as low expectations leave plenty of room for upside surprises. Four Fed speeches are on the docket this week, including an appearance by Fed Chairwoman Janet Yellen on Monday.

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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys.

ADP National Employment Report is a report that measures levels of non-farm private employment. The ADP National Employment Report is based on payroll data from over half of ADP's U.S. business clients. The data represents about 24 million employees from all 19 of the major North American Industrial Classification (NAICS) private industrial sectors.

Initial Claims is a measure of the number of jobless claims filed by individuals seeking to receive state jobless benefits. This number is watched closely by financial analysts because it provides insight into the direction of the economy. Higher initial claims correlate with a weakening economy.

 



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 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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