/perspectives/weekly-viewpoint/strong-economic-data-reignites-tapering-fears

Strong Economic Data Reignites Tapering Fears 

The Dow Jones Industrial Average (Dow) added 0.94%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM)  rose 0.35%, the Standard & Poor’s 500® Index (S&P 500) gained 0.51% and the NASDAQ Composite Index (NASDAQ) finished off...

November 11, 2013    |    By Mike Schwager

Performance for Week Ending 11/8/13:

The Dow Jones Industrial Average (Dow) added 0.94%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM)  rose 0.35%, the Standard & Poor’s 500® Index (S&P 500) gained 0.51% and the NASDAQ Composite Index (NASDAQ) finished off 0.07%. Sector breadth was positive as 7 of the 10 S&P sector groups finished higher. The Materials sector (+1.17%) led the way higher followed by Financials (+1.07%) and Energy (+1.04%).

 

Index* Closing Price 11/8/2013 Percentage Change for Week Ending 11/8/2013 Year-to-Date Percentage Change Through 11/8/2013

Dow

15761.78

+0.94%

+20.28%

Wilshire 5000

18420.44

+0.35%

+24.80%

S&P 500

1770.61

+0.51%

+24.15%

NASDAQ

3919.23

-0.07%

+29.80%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/4/13 - 11/8/13

The major market indices finished the week mixed as a batch of better than expected economic data renewed concern that the Federal Reserve (Fed) could start cutting back their bond buying program sooner rather than later. The much stronger than expected October payroll report as well as data showing the economy grew at a better than expected pace of 2.8% during the third quarter seems to have put the possibility of a December taper back on the table, although the probability still seems like a coin toss at this juncture, in my opinion.

While the Fed has continued to stress that any decision to taper will be data dependent, their recent commentary suggests they are in no hurry to act. Last week, two separate papers by members of the Fed board argued for loose monetary policy to support growth in the world’s biggest economy. The first paper supported the Fed’s strategy of maintaining low interest rates while unemployment is above 6.5% and suggested that an even lower threshold (5.5%) may be helpful. A second paper said the weakness of the U.S. economy calls for a “highly accommodative monetary policy.” The reports followed commentary from St. Louis Fed President James Bullard who said that the Fed should not rush a decision to scale back its asset purchase program. Meanwhile, Fed Governor Jerome Powell said the central bank will probably push on with highly accommodative policy for some time, with the date unclear for any tapering in $85 billion in monthly bond purchases.

While I continue to believe the market is overdue for a cooling off period, in the near-term this maybe akin to trying to keep a beach ball submerged underwater. At some point however, a period of price discovery will develop as investors gauge what has already been discounted in stock prices. In the meantime, seasonals remain favorable and the year-to-date underperformance by many institutional investors is likely to continue to foster a ‘buy the dip’ mentality as they try to play catch up heading into the year-end.

While in the near-term, emotions and headlines tend to drive stock prices, over the intermediate term its fundamentals (earnings, interest rates, valuation, etc.) that count.  As we transition to the next phase of the market cycle, where fundamentals will once again take center stage, the macro drivers of stock prices remain supportive and should ultimately become the driving force to further gains over the course of the next several quarters. In addition, while the market may be in need of a breather, it’s hard not to be upbeat on risk assets with almost every major central bank around the globe in some sort of easing effort to backstop their respective markets/economies. This scenario suggests that any pullback in the market may be short and shallow and will likely be viewed as a buying opportunity.

Payroll Report
Last Friday, the Labor Department reported that nonfarm payrolls rose 204K in October, well ahead of the 120K expected by economists. The September data was also revised higher to 163K from the original estimate of 148K. The unemployment rate held steady at 7.3% while private payrolls—which filter out government hiring/firing—rose by  a better than expected 212K (estimate 125K). Coming into the report, most economists were expecting a very soft report reflecting the one-off effect associated with the government shutdown. The data, on the other hand suggested that the labor markets have regained momentum as the 3 month average of nonfarm payrolls now stands at the highest level since April.

ECB cuts rates
Last week, the European Central Bank (ECB) unexpectedly cut its main interest rate by a quarter percent, reflecting heightened concerns over the recent plunge in inflation and the threat that it could stall the region's tepid economic recovery. The Central Bank’s main interest rate now stands at 0.25% (down from 0.5%). In a follow up press conference ECB president Mario Draghi suggested that rates could be cut further. The rate cut by the ECB and the threat of tighter policy from the Fed should pressure the Euro and put upward pressure on the dollar. According to Cornerstone Macro Research, a stronger dollar has historically been supportive of U.S. equities as it promotes higher P/E multiples.

Q3 Earnings Scorecard:
With low expectations heading into the start of reporting season, third quarter earnings continue to surprise on the upside. Through Friday, 448 members of the S&P 500 have reported quarterly results with overall earnings up by 5.0%. Of the 448 companies, almost 68% have beaten expectations while fewer than 20% have fallen short. The current “beat” rate is solidly better than the long-term average of 63%. 

The Week Ahead
Earnings season continues to wind down with just nine members of the S&P 500 scheduled to report their quarterly results. The only Dow component scheduled to report during the upcoming week is Cisco Systems, on Wednesday. The economic calendar will be back end loaded with the bulk of the data due out on Thursday and Friday. Reports of interest include initial jobless claims, the November Empire State manufacturing survey and October industrial production and capacity utilization. Several Fed officials will make public appearances this week including Dallas president Richard Fisher, Minneapolis president Narayana Kocherlakota and Philadelphia president Charles Plosser. Chairman Ben Bernanke is also scheduled to speak on Wednesday.  Also of interest this week will be the Senate Banking Committee hearing on the nomination of Janet Yellen to Federal Reserve Chairman on Thursday. If the committee votes to approve her nomination, the vote will then move to the floor of the Senate for confirmation.


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.

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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