/perspectives/weekly-viewpoint/s-p-makes-it-three-in-a-row

S&P Makes it Three in a Row: the Broader Market Applauds Earnings, Elections & Employment

The major market indices finished the week higher with both the Dow and S&P closing at new all time highs. Strong third quarter results, the ongoing recovery in the labor markets, the outcome of midterm elections and a solid report on the health of the U.S. manufacturing sector all contributed to the gains.

November 10, 2014    |    By Mike Schwager

Performance for Week Ending 11/7/2014:

The Dow Jones Industrial Average (Dow) gained 1.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.64%, the Standard & Poor’s 500® Index (S&P 500) finished up 0.69% and the NASDAQ Composite Index (NASDAQ) tacked on 0.04%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Consumer Staples sector (+2.12%) led the way followed by Industrials (+1.59%) and Utilities (+1.58%).

Index* Closing Price 11/7/2014 Percentage Change for Week Ending 11/7/2014 Year-to-Date Percentage Change Through 11/7/2014

Dow

17573.93

+1.05%

+6.02%

Wilshire 5000

20995.19

+0.64%

+9.04%

S&P 500

2031.92

+0.69%

+9.93%

NASDAQ

4632.53

+0.04%

+10.92%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/3/2014-11/7/2014

The major market indices finished the week higher with both the Dow and S&P closing at new all time highs. Strong third quarter results, the ongoing recovery in the labor markets, the outcome of midterm elections and a solid report on the health of the U.S. manufacturing sector all contributed to the gains.

Monthly Payroll Report
On Friday, the Labor Department released the monthly payroll data for October. The report showed nonfarm payrolls expanding by 214K, modestly below the 235K expected by economists. Despite the shortfall, payrolls have advanced by over 200K per month for nine consecutive months. In addition, the 6 month average stands at a solid 235K. The unemployment rate during the month unexpectedly fell to 5.8% (from 5.9%).

The payroll data followed a batch of other labor indicators that also suggested the labor markets continue to strengthen. Weekly initial jobless claims (4-week average) fell to the lowest level since April 2000 while the ADP employment change report rose by a better than expected 230K in October. The employment components for the Institute for Supply Management’s manufacturing and nonmanufacturing indices also showed continued expansion during the month.

Midterm Elections
While the market applauded the results of the midterm elections, the celebration could be short lived if Congress and the White House fail to find some middle ground. By historical standards, the period following midterm elections has been favorable for the equity markets. According to the Stock Trader’s Almanac, the November through April period following a midterm election has shown the S&P rising by an average of 15.3 percent since World War II and has posted positive results 94 percent of the time.

ECB Hints at More Stimulus
As expected, the European Central Bank (ECB) meeting concluded with no change to monetary policy. The committee left the benchmark lending rate at 0.05 percent and the deposit rate at minus 0.2 percent. The real focus was on the after meeting press conference hosted by ECB President Mario Draghi. Reports earlier in the week suggested that tensions were building between members of the ECB surrounding the central banks quantitative easing efforts.  President Draghi seemed to quash that notion by stating that the ECB is “unanimous in its commitment to using additional unconventional instruments within its mandate.” Draghi also added the ECB has tasked the committee with the timely preparation of further measures to be implemented, if needed. The latter seems to suggest that the ECB may be moving closer to expanding their QE efforts to possibly include either corporate and/or sovereign bonds – stay tuned.

Earnings Season
With results in from almost 90% of the S&P 500 members, third quarter earnings season will begin to wind down. Overall results are well ahead of expectations at the beginning of earnings season and arguably have been a major catalyst in the recent rally to new all time highs. Through Friday, 445 members of the S&P 500 have reported quarterly results with overall earnings up by 9.1% (coming into earnings season analysts were forecasting sub-5 percent growth).  Of the 445 companies, 75.2% have beaten expectations while 16.2% fell short.  The “beat” rate is solidly above the long-term average of 63%. Analysts have been revising expectations higher over the past few weeks with overall S&P 500 earnings now expected to rise by 8.4% while revenues are forecast to expand by nearly 4.0%.

The Week Ahead:
The economic calendar in the coming week will be backend loaded with the focal points being Friday’s reports on retail sales and consumer sentiment. Fewer than 20 members of the S&P 500 will report earnings next week.  Included in this group will be Dow-components Cisco Systems and Wal-Mart Stores. Federal Reserve (Fed) heads will be out and about during the week with a half dozen speeches on the docket including Fed Chair Janet Yellen on Thursday.


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.

ISM Non-Manufacturing Index An index based on surveys of more than 400 non-manufacturing firms' purchasing and supply executives, within 60 sectors across the nation, by the Institute of Supply Management (ISM). The ISM Non-Manufacturing Index tracks economic data, like the ISM Non-Manufacturing Business Activity Index. A composite diffusion index is created based on the data from these surveys, that monitors economic conditions of the nation.

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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