/perspectives/weekly-viewpoint/stuck-in-wait-and-see-mode

Stuck in Wait and See Mode

The major market indices finished lower for a third consecutive week mixed as investors digested a batch of lackluster earnings reports and growing signs the US economy remains stuck in neutral.

May 16, 2016    |    By Mike Schwager

Performance for Week Ending 5/13/16:

The Dow Jones Industrial Average (Dow) fell 1.16%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.66%, the Standard & Poor’s 500 Index (S&P 500) closed off 0.51% and the Nasdaq Composite Index (NASDAQ) dipped 0.39%. Sector breadth was negative with 9 of the 10 S&P sector groups finishing lower The Consumer Discretionary sector (-1.40%) led on the downside followed by Financials (-1.09%) and Industrials (-1.06%). The Utilities sector bucked the trend to finish up 0.87%.

Index* Closing Price 5/13/2016 Percentage Change for Week Ending 5/13/2016 Year-to-Date Percentage Change Through 5/13/2016
Dow 17535.32 -1.16% +0.63%
Wilshire 5000 21117.21 -0.66% -0.24%
S&P 500 2046.61 -0.51% +0.13%
NASDAQ 4717.68 -0.39% -5.79%

*See below for Index Definitions

 
MARKET OBSERVATIONS: 5/9/16 – 5/13/16

The major market indices finished lower for a third consecutive week mixed as investors digested a batch of lackluster earnings reports and growing signs the US economy remains stuck in neutral.

After a rocky start to the year, which resulted in a 10% plus drawdown, the market found its footing in early February. The market bottom coincided with a trough in oil prices, indications from Fed Chair Yellen that policy would only rise very gradually, stabilization in China and reduced fears the US economy was heading toward recession. The snapback rally from Feb 11 to the peak reached on April 20th pushed the market up by nearly 15%, basically putting the market back to unchanged levels for the year.

While reduced fears of a US recession and stabilization in the prices of oil were certainly factors driving the gains, the rally also seemed to be based on expectations that both economic and earnings growth will rebound in the second half of the year.

Since the top in late April, the market has been stuck in a choppy sideways trading range and it appears investors are in a wait and see mode as they are likely trying to figure out what has been priced into the markets in terms of expectations and what is likely to come to fruition in the months ahead.

The sideways action will likely continue as we enter into the early summer months reflecting a number of high profile upcoming events that are likely to keep investors close to the sidelines. On June 14/15 we have the next gathering of the Federal Open Market Committee (FOMC), which will then be closely followed by the United Kingdom’s vote on whether to continue as a member of the European Union. In mid-July the Presidential nomination process will take center stage. While these events are well known, they certainly have the ability to generate a lot of headline risk and in turn, elevated levels of volatility.

In the near-term, the market also seems to be struggling with elevated valuation levels. Based on the Bloomberg consensus estimate for 2016 earnings, the S&P 500 is currently selling at 17.5x earnings. While this is not an ‘extreme’ multiple, it is certainly elevated relative to its longer term average, suggesting the market is at or near fair value. On a positive note, as the year progresses, investors will begin to shift their focus to the 2017 estimate, which currently values the market at a more reasonable 15.45x earnings.

Other positives that have the potential to foster better performance in the second half of the year include an end to the current “earnings recession” as earnings growth is expected to turn positive during the third and fourth quarters. Interest rates will remain supportive as the Fed is expected to remain on hold until late this year. With rig count plunging by over 80% since the peak reached in October 2014, oil prices should continue to stabilize as supply and demand comeback toward equilibrium. Lastly, once the Presidential candidates are nominated in mid-July, the matter of corporate tax reform—which has bipartisan support—will likely become a topic of discussion.

In the near-term, trading will likely remain choppy, although the threat of a major drawdown in prices seems to be a low probability event. Pessimism (a contrarian indicator) towards the equity markets is very high as suggested by the most recent poll from the American Association of Individual Investors (AAII) which showed only 20% of investors are Bullish. This is almost half of the long-term average of 39%, and not far from the extreme levels reached on February 11. So in other words, the bullish case is that not many are bullish.

The Week Ahead: Earnings season continues to wind down as only 22 members of the S&P 500 are scheduled to report. Three Dow Jones industrial average components are included in this group: Home Depot, Cisco Systems, and Wal-Mart Stores. The data calendar will pick up this week with the focal points being the May Empire State manufacturing survey, the May housing market index, the April Consumer Price Index (CPI), April housing starts and building permits, April industrial production and capacity utilization, the Philadelphia Federal Reserve’s May business outlook survey, and finally, April existing home sales. The release of the minutes from last month’s Federal Open Market Committee (FOMC) meeting will be also be released mid-week. A handful of Fed speakers will be about and about during the week, including Minneapolis president Neel Kashkari, San Francisco president John Williams, Dallas president Robert Kaplan, and New York Fed president Bill Dudley.

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.

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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