/perspectives/weekly-viewpoint/stocks-stage-a-(sigh-of)-relief-rally

Stocks Stage a (sigh of) Relief Rally

The Dow Jones Industrial Average (Dow) added 1.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 0.64%, the Standard & Poor’s 500® Index (S&P 500) gained 0.75% and the NASDAQ Composite Index (NASDAQ) finished off...

October 14, 2013    |    By Mike Schwager

Performance for Week Ending 10/11/13:

The Dow Jones Industrial Average (Dow) added 1.09%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM)  rose 0.64%, the Standard & Poor’s 500® Index (S&P 500)  gained 0.75% and the NASDAQ Composite Index (NASDAQ) finished off 0.42%. Sector breadth was positive as 7 of the 10 S&P sector groups finished higher. The Utilities (+2.56%) led the way higher followed by Consumer Staples (+1.75%) and Industrials (+1.32%).

 

Index* Closing Price 10/11/2013 Percentage Change for Week Ending 10/11/2013 Year-to-Date Percentage Change Through 10/11/2013

Dow

15237.11

+1.09%

+16.28%

Wilshire 5000

17790.82

+0.64%

+20.54%

S&P 500

1703.20

+0.75%

+19.42%

NASDAQ

3791.87

-0.42%

+25.58%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 10/7/13 - 10/11/13

The major market indices finished the week mostly higher on signs lawmakers are beginning to find some middle ground in the debt ceiling debate. The markets surged on Thursday with the S&P 500 posting its largest daily percentage gain (2.18%) since early January. Last week’s gains helped reverse most of the losses seen since the start of the government shut down at the beginning of the month. As of Friday afternoon no agreement had been formally reached, although policymakers were telegraphing that they were close to reaching a deal that would temporarily (likely 6 weeks) raise the debt ceiling, and therefore remove the threat of default (at least for now).

While the news was well received, in reality, policymakers are just kicking the can down the road. In other words, a self-induced debacle may have been temporarily avoided; however, this only puts us back to square one. Investors should expect the next six weeks to remain volatile with news flow out of Washington being the primary driver of the markets. We also need to keep in mind that the U.S. is a consumer driven economy with two-thirds of economic activity related to consumer consumption. The biggest enemy of consumer sentiment is uncertainty. Said differently, the longer things remain unsettled in Washington, the more likely consumer sentiment erodes, which could ultimately create a headwind to economic growth. The early effects of the shutdown and debt ceiling debate were evident in Friday’s release of consumer confidence from the University of Michigan.  The data showed confidence dropping to the lowest level in nine months, not a good sign for an already feeble economy.

The temporary reprieve from the D.C. dysfunction should allow for a shift to refocus on the underlying macro fundamentals. Peak earnings season kicks off during the next two weeks and assuming a reopening of the government, investors will start to receive government generated economic releases. Earnings growth during the quarter is expected to be lackluster with analysts expecting overall S&P 500 earnings to expand by just 1.4%. On a positive note, expectations heading into the quarter are extremely muted; this potentially leaves plenty of room for upside surprise.

In one of the few economic releases published last week, the Labor Department reported that initial jobless claims climbed 66K to 374K in the week ended October 10. The results were well ahead of the 310K claims expected by economists, however, the Labor Department said claims were skewed by computer related issues in California (added about 33K) and the partial federal shutdown that forced some government contractors to pare staff (added about 15K). The 4-week moving average—which helps smooth the week to week volatility—came in at 325K – still a relatively low reading. Elsewhere, the Mortgage Bankers Association reported that mortgage applications in the week ended October 4 rose 1.3%, the third increase in the past 4 weeks. The uptick in overall applications reflected a 2.5% gain in the refinancing index which offset the 0.7% decline in the purchase component. During the period the 30-year fixed rate mortgage averaged 4.42%, down 7bps from the prior week. Finally, the meeting minutes from the September 17&18 Federal Open Market Committee meeting were released. While the release contained no real surprises, the minutes did show that officials were concerned about paring back stimulus at a time when the U.S. economy still looked weak and new risks were emerging on the horizon. Officials however remained hopeful they could still begin to wind down the $85 billion-per-month bond-buying program by year end.

Yellen Nomination
Last week President Obama nominated Federal Reserve Vice Chairman Janet Yellen to be the next Chairman of the Federal Reserve (Fed). While the nomination of Yellen was expected, it was viewed positively by the markets as her leadership of the Fed should ensure that monetary stimulus will continue to flow for the foreseeable future and rate hikes will be off the table for at least a couple of years. Yellen still needs to go through the formal nomination process, although most agree that in the end she will get the nod.

The Week Ahead
Third-quarter earnings season will heat up during the upcoming week with approximately 70 members of the S&P 500 scheduled to report. The release of government generated economic data continues to be an area of uncertainty due to the government shutdown. However, outside of government data, investors will get a look at the October Empire Manufacturing survey, the National Association of Home Builders’ October housing index,  the Fed’s Beige Book, and the October Philadelphia Fed survey. Fed Heads will be out and about during the week with 15 various appearances on the docket.


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.

NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.

NAHB/Wells Fargo Housing Market Index is an index based on a monthly survey of members belonging to the National Association of Home Builders (NAHB) that is designed to measure sentiment for the U.S. single-family housing market. The NAHB/Wells Fargo Housing Market Index (HMI) is a widely watched gauge of the outlook for the U.S. housing sector.

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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