Scots and Dots

The Dow Jones Industrial Average (Dow) added 1.72%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.93%, the Standard & Poor’s 500® Index (S&P 500) finished up 1.25% and the NASDAQ Composite Index (NASDAQ) tacked on 0.27%.

September 22, 2014    |    By Mike Schwager

Performance for Week Ending 9/19/2014:

The Dow Jones Industrial Average (Dow) added 1.72%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.93%, the Standard & Poor’s 500® Index (S&P 500) finished up 1.25% and the NASDAQ Composite Index (NASDAQ) tacked on 0.27%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Telecom sector (+3.4%) led the way higher followed by Healthcare (+2.01%) and Materials (+1.90%).

Index* Closing Price 9/19/2014 Percentage Change for Week Ending 9/19/2014 Year-to-Date Percentage Change Through 9/19/2014





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 9/15/2014-9/19/2014

The major market indices finished the week solidly higher after a number of key risk events turned out to have market friendly outcomes. The Federal Open Market Committee (FOMC) meeting was less hawkish than markets anticipated; the European Central Bank’s (ECB) new lending program was not well received, although this raised hopes that the ECB will eventually embark on a full scale quantitative easing program; and Scotland voted to reject independence.

While the market is currently sitting at near new all-time highs the recent move has been on very light volume, suggesting there isn’t a lot of conviction behind the advance. The market is also technically “overbought,” suggesting a period of consolidation may be among us. If the markets were to take a breather in the coming weeks, the weakness would be seen as a “pause to refresh” that would likely set the stage for the next leg higher. We are also on the cusp of entering into a seasonally weak period for the markets. With that said, the broader narrative remains supportive of further gains. The U.S. economy looks poised to gather momentum over the next few quarters, the labor markets continue to recover, corporate earnings are likely to post solid gains both this year and next, inflationary pressure should remain muted, gasoline prices continue to trend lower and monetary policy is expected to remain loose through most of 2015. On the valuation front, the S&P is selling at approximately 15-times the 2015 consensus estimate; while not cheap, the market is certainly not stretched either.

FOMC Meeting:
Investors were on edge heading into last week’s two-day FOMC meeting due to the heated debate over whether the Federal Reserve (Fed) would eliminate or add a qualifier to their “considerable time” statement. The major concern was that any adjustment would signal that “lift off” may come sooner than what markets were expecting. In the end, the FOMC maintained their pledge to keep rates low for a “considerable time” following the conclusion of their bond buying program next month.

While the decision to maintain the considerable time language and the follow up press conference from Fed Chair Yellen were viewed in a dovish light, the tone of the after meeting statement and forward rate projections’ had a mildly hawkish tilt. In particular, the committee made a technical adjustment to its “dot chart” by submitting projections equal to the mid-point of the range on the federal funds rate. These forecast revisions resulted in a tightening in the median policy path, with the median funds rate now expected to reach 1.375% in 2015, up from its June forecast of 1.125%. The Fed funds rate is projected to reach 2.875% in 2016, and 3.75% in 2017.

While these new figures suggest the pace of rate hikes will be quicker and higher than what the market was expecting, Dr. Yellen warned about putting too much emphasis on the “dots.”  Yellen added “what you don’t see in the so-called “dot plot” is the uncertainty that each individual, each participant sees around their own projection. So things will depend on how the economy evolves.”

Scotland Rejects Independence:
The other key risk event was the Scottish referendum for independence from the United Kingdom.  Polls over the past couple weeks framed the race as too close to call, although “no” voters did have a slight edge during the final days. In the end, voters rejected independence by a 55 to 45 margin. 

Besides the uncertainty of how an independent Scotland would operate (currency, debt distribution, etc), there were  fears that a “yes” vote would open the door to similar moves by other nations as well as stir up anti-euro sentiment within Britain. While these fears have not been completely taken off the table, the decision by Scotland to stay united seems to have tamped them down a notch.

Data Wrap Up:
This week’s economic reports were a mixed bag, but overall the economy still appears to be gaining traction. On the labor front, initial jobless claims during the week ended September 13 fell 36K to 280K, the lowest reading in two-months and solidly below the 305K expected by economists. The 4-week moving average—which helps smooth the week to week volatility—fell to 299.5K during the prior period. On the housing front, the Commerce Department reported that housing starts during the month of August plunged by 14.4% to 956K annualized units, although the drop followed a 22.9% surge in the prior month. Building Permits—which tend to be a leading indicator of future construction—fell 5.6% to an annualized rate of 998K. Meanwhile, both the Philadelphia and New York Federal Reserve banks reported that regional manufacturing conditions remained solidly in expansion territory during September. The reports were dulled a bit by another manufacturing report showing industrial production declined for the first time in seven months as auto manufacturers slowed production lines.

The Week Ahead:
Highlights of the upcoming economic calendar include August existing home sales, the PMI Manufacturing Index, August new homes sales, August durable goods orders, the University of Michigan’s final September consumer sentiment survey and the final estimate of second-quarter GDP. Third quarter earnings season is slowly coming into play with nine members of the S&P 500 scheduled to report results, including Dow component Nike on Thursday. Fed heads will be active during the week with 10 appearances currently on the docket.  Investors will pay close attention as they seek out additional clarity between the “dovish” guidance and “hawkish” dot projections.  Other data/events of interest include the release of flash manufacturing data out of China and Europe and a speech by ECB President Draghi to the EU Parliament in Brussels.


The Dow Jones Industrial Averageis 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.

Purchasing Managers Index – PMI is an indicator of the economic health of the manufacturing sector. The PMI index is based on five major indicators: new orders, inventory levels, production, supplier deliveries and the employment environment.

Michigan Consumer Sentiment Index – MCSI is a survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall 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 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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