/perspectives/weekly-viewpoint/steady-as-she-goes-(1)

Steady As She Goes

The Dow Jones Industrial Average (Dow) rose 1.24%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.51%, the Standard & Poor’s 500® Index (S&P 500) gained...

June 09, 2014    |    By Mike Schwager

Performance for Week Ending 6/6/14:

The Dow Jones Industrial Average (Dow) rose 1.24%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.51%, the Standard & Poor’s 500® Index (S&P 500) gained 1.34% and the NASDAQ Composite Index (NASDAQ) tacked on 1.86%. Sector breadth was positive as 9 of the 10 of the S&P sector groups finished higher. The Financials sector (+2.32%) paced the gains followed by Industrials (+2.16%) and Consumer Discretionary (+1.80%).

Index* Closing Price 6/6/2014 Percentage Change for Week Ending 6/6/2014 Year-to-Date Percentage Change Through 6/6/2014

Dow

16924.28

+1.24%

+2.10%

Wilshire 5000

20252.56

+1.51%

+5.19%

S&P 500

1949.44

+1.34%

+5.47%

NASDAQ

4321.40

+1.86%

+3.47%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/2/14 - 6/6/14

The major market indices finished higher for a third consecutive week as the week’s two key “risk events” played out in the markets favor. Both the S&P and Dow hit new all-time highs while the NASDAQ Composite Index finished just shy of the highest level in over 14 years. Although the market appears mildly overbought at current levels and may be in need of a resting period, the path of least resistance over the course of the year still appears to be higher as the equity friendly narrative (economy, earnings, Federal Reserve policy) remains in place.

As widely expected the European Central Bank (ECB) introduced a series of measures aimed at staving off the growing threat of deflation. Their benchmark lending rate was reduced and in a historical move by a major central bank, they lowered their deposit rate to negative 0.1%. Pushing the deposit rate below zero essentially means banks will have to start paying the central bank for the privilege of holding their excess reserves. This action is an effort to get banks to start lending. The ECB action also included a package of $545 billion (400 billion euro) of low interest rate loans available to banks with the intent that the funds be used to make loans to small and medium sized businesses. ECB President Mario Draghi also indicated his willingness to take additional steps and hinted at the possibility of quantitative easing if ultra-low inflation persists. “Are we finished? The answer is no” Draghi said.

Since monetary policy tends to work with a significant lag, the stimulus efforts by the ECB may not filter their way into the economy for at least a few quarters. However, Draghi’s promise to do more should remain supportive for risk assets. In other words, the ECB’s action, at least in the near term, appears to be more market friendly than economic friendly – stay tuned.

On Friday, the Labor Department reported that nonfarm payrolls rose by a better than expected 217K while the unemployment rate was unchanged at 6.3%. Private payrolls also surprised to the upside coming in at 216K. All in all, a “goldilocks” report (not too hot, not too cold) suggested the labor market continues to heal. From a Federal Reserve (Fed) perspective, the report will likely keep the current tapering pace on schedule ($10B/meeting) but leave them in no rush to start hiking interest rates.

Economic Roundup
Last week’s batch of economic data provided more evidence that the U.S. economy is moving past the weather induced soft patch. On the labor front, weekly initial jobless claims data showed the pace of firings continues to trend lower.  For the week ended May 31 jobless claims came in at 312K, on target with expectations. More importantly, the 4-week moving average—which helps smooth the week to week volatility—came in at 310K, the lowest level since June 2007. Pent-up demand, the improving economic environment, and better credit availability pushed May vehicle sales to a seasonally adjusted rate of 16.7 million—the best showing since July 2006. Elsewhere, both the ISM manufacturing and non-manufacturing indices remained firmly entrenched in expansionary territory. In particular, the non-manufacturing (services) report came in solidly ahead of economists’ expectations. This report bodes well for the economy as service oriented businesses make up approximately 90% of the U.S. economy. Last week also brought the quarterly release of the Fed’s Flow of Funds report. The report showed that U.S. household net worth rose to 1.9% during the first quarter to $81.8 trillion.

Overall, the U.S. economy appears to be doing well and the consensus among economists is that GDP growth during the current quarter should rebound to a 3%-plus pace.

Beige Book
The Fed released it Beige Book report last week. The report, which compiles snapshots of business conditions in each of the 12 Fed bank districts, showed economic activity expanded at a modest to moderate pace across the country. Consumer spending rose at a moderate pace across most districts, even though the late Easter and long winter delayed the spring shopping season. Vehicle sales were robust and auto dealers expressed optimism about the six-month outlook. Manufacturing activity expanded in all 12 districts. Residential real estate activity was mixed as low inventory levels weighed on existing home sales in most districts. Labor market conditions generally improved, with employment flat to up modestly in most areas. Wage pressures remained subdued and overall price pressures remained "contained."

The Week Ahead

The economic calendar will be back end loaded with the first notable report being Thursday’s release of May retail sales. According to Bloomberg, economists expect sales to expand by 0.6% after a weak showing (+0.1%) during the prior month.  On Friday, May Producer Price Index (PPI) and the June University of Michigan consumer sentiment survey will be reported. The PPI is expected to show a modest uptick in producer inflation while the Michigan sentiment report is expected to climb to 83.0 from 81.9 last month. The earnings calendar will be a nonevent this week as only one member of the S&P 500 member is scheduled to report. In light of the typical blackout period ahead of the Federal Open Market Committee (FOMC) meetings, the Fed speaking calendar will be very light with only St. Louis president James Bullard and Boston president Eric Rosengren scheduled to speak on Monday. The FOMC’s next scheduled meeting is on June 17 & 18.

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 is 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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