/perspectives/weekly-viewpoint/steady-as-she-goes

Steady as She Goes

The Dow Jones Industrial Average (Dow) added 0.65%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 0.27%, the Standard & Poor’s 500® Index (S&P 500) gained 0.37% and the NASDAQ Composite Index (NASDAQ) finished up...

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November 25, 2013    |    By Mike Schwager

Performance for Week Ending 11/22/13:

The Dow Jones Industrial Average (Dow) added 0.65%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 0.27%, the Standard & Poor’s 500® Index (S&P 500) gained 0.37% and the NASDAQ Composite Index (NASDAQ) finished up 0.14%. Sector breadth was mixed with 4 of the S&P sector groups finished higher and 6 finishing lower. The Financials sector (+1.69%) was the best performer while Utilities (-1.77%) was the worst.

Index* Closing Price 11/22/2013 Percentage Change for Week Ending 11/22/2013 Year-to-Date Percentage Change Through 11/22/2013

Dow

16064.77

+0.65%

+22.59%

Wilshire 5000

18766.53

+0.27%

+27.15%

S&P 500

1804.76

+0.37%

+26.54%

NASDAQ

3991.65

+0.14%

+32.20%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/18/13 - 11/22/13

The major market indices finished the week higher with both the Dow and S&P 500 posting new all time highs. The Dow and S&P also finished above new milestone markers (16,000 and 1,800 respectively). The NASDAQ Composite remains just shy of the 4,000 level, an area last visited in September 2000. Last week’s gains were driven by growing optimism that the global economy is gaining traction and that interest rates will remain very low for the foreseeable future.

Adding to the positive tone was the nomination of Janet Yellen by the Senate Banking Committee. In a letter sent to the Senate Banking Committee prior to her nomination vote, Yellen argued that the benefits of quantitative easing have outweighed the costs. Yellen said the U.S. economy would likely be weaker if the central bank had not acted aggressively.  "While monetary policy is not a panacea for all of the nation's economic difficulties, our economic situation would almost certainly be far worse had the Federal Reserve (Fed) not acted aggressively."  Yellen is considered a “dove” and is expected to maintain very accommodative monetary policy. Yellen’s nomination is now set to move to the Senate for final confirmation early next month. Five Republicans committed to giving her the thumbs up last week, essentially guaranteeing her nomination.

FOMC Meeting Minutes. The meeting minutes from October Federal Open Market Committee (FOMC) meeting were released last week. According to the minutes, policy makers generally expected that economic data would prove consistent with the Committee’s outlook for ongoing improvement in labor market conditions and would thus warrant trimming the pace of purchases in coming months. In the near term, the policy around asset purchases will not change and the Fed will continue to acquire $85 billion in bonds per month.

In discussing the decision to stand pat at the October meeting many members stressed the data-dependent nature of the current asset purchase program, and some pointed out that, if economic conditions warranted, the Committee could decide to slow the pace of purchases at one of its next few meetings. However, there was a discussion about strengthening the forward guidance in the policy statement by adding a qualitative passage regarding how “headwinds restraining the economic recovery were likely to abate only gradually.”

All in all, asset purchases are likely to be tapered beginning in the next few months with an ultimate conclusion by middle/late next year. Meanwhile, the Fed looks likely to continue discussing ways to enhance its forward guidance to ensure that tapering does not lead to an unwelcome tightening in financial conditions.

In an effort to avoid another violent uptick in interest rates like we experienced during the summer when the Fed first starting talking about “tapering,” Fed Chairman Bernanke stressed that tapering doesn’t equal tightening. Speaking at the National Economists Club in Washington, Bernanke said that the Fed will probably hold down its main interest rate long after ending its bond buying, and possibly after unemployment falls below the 6.5% threshold. The Fed chief said investors have become better at “differentiating” between the Fed’s bond-purchase plan and commitment to hold down interest rates. Going forward, policy makers will likely continue to emphasize, to make it crystal clear, that a reduction in quantitative easing won’t indicate that the central bank plans to raise interest rates any sooner. 

Investor Sentiment Remains Supportive. The American Association of Individual Investors (AAII) reported that bullish sentiment in the most recent period fell to 34.4%, the lowest level since late-August and below the long-term average of 39%. Bearish sentiment rose to 29.5% and now stands at the highest level since early October.  Paradoxically, the falling levels of bullishness and rising levels of bears should be viewed as a mild positive for the markets as sentiment readings tend to be contrarian in nature.

Mutual Fund Flows continued to show the trend of rotating out of bonds and into equities remained intact.  According to the Investment Company Institute (ICI), overall mutual fund flows rose by $1.2 billion in the latest week.  Equity funds took in $7.3 billion of new money with almost $4 billion directed to domestic funds while International funds captured $3.3 billion. Bond funds saw another $7.6 billion in funds exit with Taxable funds losing $6.4 and Muni funds seeing outflows of $1.2 billion. Hybrid funds (stocks & bonds) had inflows of $1.5 billion.

Earnings Roundup. Third quarter earnings season continues to wind down. Through Friday, 488 members (98%) of the S&P 500 have reported their quarterly results with overall earnings up by 5.0%. Of the 488 companies, 67% have beaten expectations while 20% have fallen short. On the sector level, Consumer Discretionary (+11.6%) has posted the strongest results while the Energy sector (-9.7%) has posted the worst (and the only negative year-over-year results).  Revenues during the quarter have grown by a lackluster 3.3%.

The Week Ahead.  Data during upcoming holiday shortened week (markets are closed on Thursday for Thanksgiving and will close early (1:00ET) on Friday) will be front end loaded. Housing will be a major focal point of the economic calendar with reports due out on November pending home sales, September and October housing starts and building permits, and the September S&P Case-Shiller Home Price Index.  Other reports of interest include the Conference Board’s November consumer confidence index, October durable goods orders and the University of Michigan’s November consumer sentiment survey. The earnings calendar continues to wind down with only five members of the S&P 500 scheduled to report results. The U.S. holiday shopping season is also set to kick-off this week. With consumer spending accounting for the bulk of the U.S. economy, the numbers will be watched very closely.


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.

American Association of Individual Investors – AAII is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.

S&P/Case-Shiller Home Price Indexes is a group of indexes that tracks changes in home prices throughout the United States. The indexes are based on a constant level of data on properties that have undergone at least two arm's length transactions. Case-Shiller produces indexes representing certain metropolitan statistical areas (MSA) as well as a national index.

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 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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