/perspectives/weekly-viewpoint/septaper”-looks-imminent

“Septaper” Looks Imminent

The Dow Jones Industrial Average (Dow) fell 0.47%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.62%, the Standard & Poor’s 500® Index (S&P 500) added 0.46% and the NASDAQ Composite Index (NASDAQ) tacked on...

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August 26, 2013    |    By Mike Schwager

Performance for Week Ending 8/23/13:

The Dow Jones Industrial Average (Dow) fell 0.47%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.62%, the Standard & Poor’s 500® Index (S&P 500) added 0.46% and the NASDAQ Composite Index (NASDAQ) tacked on 1.53%. Sector breadth was positive as 9 of the10 S&P sector groups finished higher. The Materials sector (+1.04%) led the way higher followed by Technology (+0.86%) and Consumer Discretionary (+0.73%). The Consumer Staples sector (-0.20%) was the sole laggard.

Index* Closing Price 8/23/2013 Percentage Change for Week Ending 8/23/2013 Year-to-Date Percentage Change Through 8/23/2013

Dow

15010.36

-0.47%

+14.55%

Wilshire 5000

17328.37

+0.62%

+17.40%

S&P 500

1663.47

+0.46%

+16.64%

NASDAQ

3657.79

+1.53%

+21.14%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 8/19/13 - 8/23/13

The major market indices finished the week mostly higher as investors balanced the growing likelihood of a cutback in the Federal Reserve’s (FED’s) bond buying activity at next month’s FOMC meeting against signs the global economy is gaining traction. Also helping to support the market was the recent surge in investor bearishness. In the most recent American Association of Individual Investors (AAII) poll, the percent of investors calling themselves bearish expanded for a sixth consecutive week and now stands at the highest level since mid April. The percent of Bullish investors fell to 28.96%, the lowest since late April and well below the10-year average of 40%.

As we know, markets tend to climb a “wall of worry” and while emotions (fear & greed) tend to play a large part in investment decisions, they also tend to be contrarian in nature.  In other words, investors tend to be the most fearful (bearish) at/near market troughs and the most upbeat (bullish) at/near market tops. 

Over the next couple weeks market activity is likely to remain choppy as investors parse every new economic release ahead of the September 17 &18 FOMC meeting and reposition for an expected drift higher in interest rates. In addition, seasonal headwinds will likely be a factor as the month of September has typically been a poor month for stock market performance. While the near to intermediate term outlook for the markets remains somewhat patchy, the longer-term view still remains bullish with the potential for 30-40 percent upside within the next two to three years.

“Septapering” Likely
In terms of reducing the pace of bond buying activity, the FED has essentially backed itself into a corner and now appears caught between a rock and a hard place. In other words, it would almost be more troubling, at this point, if the FED did nothing. The FED has been telegraphing that a cutback in bond buying is based on expectations of improving economic conditions. Doing nothing would send the signal that the economic recovery is beginning to lose steam.

With economic growth still relatively modest, there has been growing talk that the FED may choose a “taper-lite” approach. Last week in an interview with the Wall Street Journal, Boston FED President Eric Rosengren took on a cautious tone and hinted of the possibility of a baby step approach. According to Rosengren "if you're very uncertain about how strong the improvement in the economy is, and how self-sustaining, then you should move in fairly small increments." A recent Bloomberg poll showed economists expecting the FED’s bond buying activity to be reduced by $10 billion per month to $75 billion. In a similar poll in late June, economists were expecting the program to be pared by $20 billion per month – stay tuned.

Housing – Mixed Signals
Two key reports on the housing sector sent a mixed signal on the current state of the sector. On Wednesday the National Association of Realtors reported that existing home sales in July rose by a better than expected 6.5% to an annualized pace of 5.39 million units. On a year-over-year basis, July sales were up 17.2%. However, on Friday the Commerce Department reported that sales of new homes plunged by 13.4% in July to an annualized pace of 394K units. This was the first dip below the 400K level this year and the lowest reading since October 2012. While constraints in land and building materials were cited, one has to wonder how much the recent rise in mortgage rates impacted sales. According to Freddie Mac, the average rate for a 30-year fixed mortgage rose to 4.58% last week, a two-year high. Arguably the increase in mortgage rates has not been much of a headwind to the overall housing market, and in fact may be acting more as a near term catalyst to get “fence sitters” into the market. However, as mentioned in these missives, higher rates tend to act with a lag so more time will likely be needed to gauge the overall impact. In addition, since closing time on an existing home sale can take up to 90 days (or more); the recent jump in rates is probably not adequately reflected in the current data.

FOMC Meeting Minutes
Last weeks much anticipated release of the July FOMC meeting minutes left Traders with little in the way of new news. While the minutes gave no indication of an immediate change in monetary policy, committee members said they were “broadly comfortable” with Chairman Bernanke’s plan to start reducing bond buying later this year if the economy  improves, with a few members saying tapering might be needed soon.  The statement suggested that the first reduction in the pace of quantitative easing (QE) in September remains very much on the table. In the end, this conclusion seemed little different than what the markets have been expecting over the course of the past few weeks.

The Week Ahead
The economic calendar will be the focal point during the upcoming week. High profile releases include durable goods orders, consumer confidence, the Case-Shiller Home Price data, pending home sales, the first revision to second-quarter GDP, initial jobless claims, and the University of Michigan consumer sentiment survey. Second quarter earnings reports continue to dwindle with just a handful of S&P 500 companies reporting during the week. Three FED Heads are scheduled to speak this week and investors are expected to tune in for any additional insight into the FED’s tapering plans.


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.

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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