/perspectives/weekly-viewpoint/stocks-stage-a-taper-tantrum

Stocks Stage a Taper Tantrum

The Dow Jones Industrial Average (Dow) fell 1.80%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.18%, the Standard & Poor's 500 Index (S&P 500) declined by 2.11% and the NASDAQ Composite Index (NASDAQ) shed...

June 24, 2013    |    By Mike Schwager

Performance for Week Ending 6/21/13:

The Dow Jones Industrial Average (Dow) fell 1.80%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.18%, the Standard & Poor’s 500 Index (S&P 500) declined by 2.11% and the NASDAQ Composite Index (NASDAQ) shed 1.94%. Sector breadth was negative as all 10 of the S&P sector groups finished lower. The Telecom sector (-3.74%) was the worst performer followed by Utilities (-2.87%) and Materials (-2.44%).

Index* Closing Price 6/21/2013 Percentage Change for Week Ending 6/21/2013 Year-to-Date Percentage Change Through 6/21/2013

Dow

14799.40

-1.80%

+12.94%

Wilshire 5000

16479.56

-2.18%

+11.65%

S&P 500

1592.43

-2.11%

+11.66%

NASDAQ

3357.25

-1.94%

+11.18%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 6/17/13 - 6/21/13

The major market indices finished the week sharply lower and have now finished down in four of the past five weeks. After starting the week on a positive note, markets plunged on Wednesday and Thursday after Federal Reserve (FED) Chairman Bernanke put the markets on notice that the days of quantitative easing may be numbered. At a press conference following the conclusion of last week’s Federal Open Market Committee (FOMC) meeting Bernanke said the central bank could begin pulling back on its $85 billion-a-month bond-buying program later this year. While the FED took no immediate action at the conclusion of the FOMC meeting, Bernanke said at the outset of his press conference that he and other officials believe the downside risks to the economy have diminished and the need to continue adding to the FED’s balance sheet is ebbing. Bernanke also said the quantitative easing program could be completed by the middle of next year as the jobless rate reaches a projected 7%.

Chairman Bernanke used an auto analogy during his press conference to help summarize the FED’s stance. I quote “if the incoming data supports the view that the economy is able to sustain a reasonable cruising speed, we will ease the pressure on the accelerator by gradually reducing the pace of purchases. However, any need to consider applying the brakes by raising short-term rates is still far in the future.” What Bernanke didn’t seem to expect was investors throwing the markets gear shift into reverse.

With FED’s benchmark lending rate hovering near zero, communication has become a major part of the FED’s policy strategy; although the market’s negative knee jerk reaction seems to say TMI (too much information). While there is little doubt Bernanke and the FED intended to communicate a “dovish” message, some of the key points seemed to get lost in translation. The FED is clearly thinking of slowing its bond buying activity, although they stressed that the action will be data dependent and the pace of buying could be lowered or increased depending how the data plays out. Secondly, with the pace of inflation muted and clearly well below the FED’s 2.0% objective, fears of a rate hike in the near future seem misplaced. Bernanke also reiterated that the FOMC’s 6.5% threshold for the unemployment rate is a starting point to begin discussions on rate hikes and not an automatic trigger.

The S&P 500 is now off just under 5% since the closing high reach on May 21 – which coincidentally was the day before Bernanke first stated that the FED could potentially taper its bond buying program "in the next few meetings" if the outlook for the economy continues to improve.  While it’s not uncommon to see this type of knee jerk reaction to transitions in monetary policy, investors appear to be overlooking the positives, which include the market’s attractive valuation and improving economic prospects (which in turn should set the stage for better earnings growth).

Signs of capitulation were evident in last week’s action with traditional “fear fulcrums” signaling growing panic in the market place. This is notable as capitulation is often a precursor to near-term market troughs. Bottom-line: a market correction caused by good news will likely be short lived. The economy appears to be improving and seems to be on a sustainable path to recovery. This, in my opinion, should ultimately prove to be supportive to the continuation of the bull market – stay tuned.

Summary of Economic Projections
At the conclusion of the FOMC meeting, the committee released an updated set of economic projections. As was widely expected, the growth outlook for 2013 was lowered with the central tendency range falling to 2.3% - 2.6% from 2.3% - 2.8%. The 2014 projected GDP growth rate range was raised to 3.0% -3.5%. The committee lowered its forecast for the average Q4 unemployment rate for 2013 to a range of 7.2% -7.3% from 7.3% -7.5%. Finally, the inflation forecast was marked down to a range of 0.8% -1.2% from 1.3% -1.7%, but the committee continued to project that inflation will gradually return to levels consistent with their target.

Economic Roundup
This week’s batch of economic data was in sync with the FED’s implication that economic conditions continue to firm. On the manufacturing front, the Philadelphia Federal Reserve reported that manufacturing in the greater-Philly region returned to expansion mode during the month of June. This was also the case for manufacturing activity in the greater New York region. On the housing front, the National Association of Realtors reported that existing home sales rose 4.2% in May to an annualized rate 5.18 million units. The six-month moving average rose to 4.98 million units, the highest level since late-2007. In addition, home builders are becoming increasingly optimistic according to the National Association of Homebuilders. The trade group reported that their Housing Market Index rose to 52 (from 44) in June, the biggest one-month gain since 2002.

The Week Ahead
The economic calendar will take center stage this week with the focus early in the week on durable goods orders, new home sales, the April Case-Shiller home price index and the Conference Board's consumer confidence index. Other reports of interest include personal income and spending, pending home sales and the University of Michigan consumer sentiment survey. In addition, the final estimate of first-quarter GDP will be released on Wednesday. The earnings calendar picks up a bit this week with 12 members of the S &P 500 scheduled to report results. Several FED officials are scheduled to make public appearances this week. In light of the negative reaction to Bernanke’s press conference, FED official are likely to fine tune their presentations to clarify their intentions and stress that “tapering” is not the same as tightening and rates hikes are not on the horizon.


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.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.

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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