Sell in May and Go Away?
The major market indices finished lower for a second consecutive week reflecting building concerns over mixed US economic data and the slowing pace of global growth.
May 09, 2016
| By Mike Schwager
Performance for Week Ending 5/6/2016:
The Dow Jones Industrial Average (Dow) fell 0.19%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.56%, the Standard & Poor’s 500 Index (S&P 500) closed off 0.40% and the Nasdaq Composite Index (NASDAQ) dipped 0.82%. Sector breadth was mixed with 5 of the S&P sector groups finishing lower, 4 finishing higher and Telecom finished flat. The Energy sector (-2.95%) led on the downside while the Consumer Staples sector (+1.74%) was the best performer.
||Closing Price 5/6/2016
||Percentage Change for Week Ending 5/6/2016
||Year-to-Date Percentage Change Through 5/6/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 5/2/16 – 5/6/16
The major market indices finished lower for a second consecutive week reflecting building concerns over mixed US economic data and the slowing pace of global growth. Elevated valuation levels, generally lackluster first quarter earnings trends, and weak readings on the US labor market added to the woes. After plunging during the first several weeks of the year, stocks staged a sharp rebound off the February 11 lows, leaving the market now more/less back to where we started the year. While the snapback rally seemed to suggest that worries earlier in the year were overdone and that the macro environment in the second half of the year should be more supportive for equities, we will likely need to buy some time until the latter becomes more evident.
Sentiment toward the equity market remains very negative, as underscored by the latest poll from the American Association of Individual Investors (AAII), that showed only 22% of those polled are “bullish” on the market outlook. While still above the 17.9% reading reached earlier this year, one could argue that the bullish argument towards equities is that no one is bullish. Investors who consider themselves “neutral” on the market outlook rose to an elevated 47%, suggesting high levels of uncertainty in the months ahead. But, as Warren Buffet once said, “The future is never clear; you pay a very high price in the stock market for a cheery consensus. Uncertainty actually is the friend of the buyer of long-term values.” – stay tuned.
Last week the Labor Department reported that non-farm payrolls expanded by just 160K during the month of April, sharply below the 200K expected by economists and the slowest pace since September 2015. In addition, the Labor Department revised lower the prior two months data resulting in 19K fewer jobs created during the two month period. The unemployment rate was unchanged at 5.0%. Average hourly earnings grew by a better than expected 0.3% during the month and are now up 2.5% on a year-over-year basis. Earlier in the week, ADP reported that US corporations added an estimated 156K jobs during the month of April, well below economists’ expectations of +195K while initial jobless claims during the week ended April 30 rose 17k to 274K, the highest level in 5 weeks.
While clearly the recent labor data is disappointing, with the economy currently at “full employment,” you would expect to see some moderation in job growth. The uptick in wage growth to a 2.5% year-over-year seems to be suggesting that labor market conditions are tightening.
The recent spottiness in overall economic data has clouded the path of interest rate hikes by the Federal Reserve. The U.S. economy grew by just 0.5 percent during the first quarter and inflation remains below the Fed's 2 percent target. According to Bloomberg, the probability of a rate hike at the June FOMC meeting stands at only 4%. In fact the data suggests that the highest probability of a rate hike is not until February of next year. While the latter prediction suggests investors may be too complacent toward Fed policy, they are likely betting that the Fed will to take a very cautious forward path, especially in light of any potential fallout from the United Kingdom’s June vote to stay or exit the Eurozone, as well as, any political developments surrounding the US presidential election in November.
The Week Ahead: Earnings season will continue to wind down with only 20 members of the S&P 500 scheduled to report results during the week, including Dow-component Walt Disney on Tuesday. The data calendar will also be relatively light with the focal point coming on Friday when April retail sales will be reported. Other reports of note include; the March JOLTS (Job Openings and Labor Turnover Survey) report, the April Producer Price Index (PPI), March business inventories and the University of Michigan’s May consumer sentiment survey. Fed Heads will be out and about with a handful of speeches on the docket. Chicago Fed president Evans and Minneapolis president Neel Kashkari will speak on Monday; Cleveland president Loretta Mester and Kansas City president Esther George speak on Thursday; and San Francisco president John Williams will speak on Friday.
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.
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.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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