Tapering Cheers Replace Tapering Fears

The Dow Jones Industrial Average (Dow) added 2.96%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.46%, the Standard & Poor’s 500® Index (S&P 500) rose 2.42% and the NASDAQ Composite Index (NASDAQ) tacked on ...

December 23, 2013    |    By Mike Schwager

Performance for Week Ending 12/20/13:
The Dow Jones Industrial Average (Dow) added 2.96%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 2.46%, the Standard & Poor’s 500® Index (S&P 500) rose 2.42% and the NASDAQ Composite Index (NASDAQ) tacked on 2.59%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Industrials sector (+3.26%) led the way followed by Materials (+2.80%) and Technology (+2.77%).
Index* Closing Price 12/20/2013 Percentage Change for Week Ending 12/20/2013 Year-to-Date Percentage Change Through 12/20/2013





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 12/16/13 - 12/20/13

The major market indices finished the week solidly higher after the Federal Reserve (Fed) announced that they will begin to taper their quantitative easing program. While the threat of tapering back in May resulted in a sharp sell-off in the market, this time around investors were better prepared and have seemingly come to the conclusion that the economy is on better footing and can withstand a gradual reduction in bond buying activity. In other words, investors viewed the tapering announcement as a vote of confidence that the economy is now on a path of self sustainability.

Tapering looks more like Tinkering
While one bearded man is set to visit the masses in the coming days, another bearded man delivered an early holiday present to Wall Street. At the conclusion of the two-day Federal Open Market Committee (FOMC) meeting, the Fed announced they will begin to reduce their monthly bond buying program to $75 billion per month from $85 billion, citing the cumulative progress toward maximum employment and the improvement in the outlook for labor market conditions. The reduction of “only” $10 billion per month was viewed as more of a tinker than taper and highlights the Fed’s desire to take things slow. The FOMC also reiterated their view that they will refrain from raising the benchmark interest rate until 2015. The central bank left unchanged its statement that it will probably hold its target interest rate near zero “at least as long as” unemployment exceeds 6.5% and so long as the outlook for inflation is no higher than 2.5%. The panel added it “likely will be appropriate” to refrain from raising its benchmark rate “well past the time” joblessness falls below 6.5 %, especially if inflation falls short of its target. The Fed’s statement was viewed as very dovish and underscored that interest rates will remain very low for a considerable period.

The FOMC also released their updated central tendency projections.  The committee now sees the jobless rate falling to a range of 6.3% to 6.6% by the end of 2014 and declining to a range of 5.8% to 6.1% by the end of 2015.  Economic growth is forecast to rise to 2.8% to 3.2% in 2014 and then to 3.0% to 3.4% in 2015.  A majority of FOMC participants -- 12 out of 17 – expect the first increase in the main interest rate in 2015. Fed officials’ median estimate for the federal funds rate at the end of 2015 was 0.75 percent, and 1.75 percent for the end of 2016.

Economic Data Confirms Fed Action
Economic data over the past several weeks has been suggesting that economic momentum is beginning to gather some steam. Last week’s data continued on this path. On Friday, the Commerce Department reported that the third and final revision to the Q3 GDP showed the economy expanded at a 4.1% rate, solidly ahead of the second revision that showed the economy expanded at a 3.6% pace. Personal Consumption was revised higher to 2.0% from the prior estimate of 1.4%. On the manufacturing front, the Philadelphia Federal Reserve reported that manufacturing activity in the greater Philly area expanded for a seventh consecutive month. The Philly Fed Index rose to 7.0 in December from 6.5 in the prior month although the reading fell short of the 10.0 expected by economists. Despite the shortfall in the headline number, the “guts” of the report were solid with the new orders, employment and shipments components all gaining ground.  Meanwhile, the Conference Board’s Leading Economic Index (LEI) rose 0.8% in November, reaching its highest level since February 2008. The report suggests the expansion in economic activity should continue and may even modestly pick up in the early months of 2014. On the housing front, the Commerce Department reported that housing starts during the month of November surged by 22.7% to an annual rate of 1091K. Results were well ahead of economists’ expectations and leave the index at the highest level since February 2008.

Investor Sentiment: Last week the American Association of Individual Investors (AAII), reported that bullish sentiment rebounded to an eight-week high and pessimism remained below average for the 10th consecutive week. Bullish sentiment, i.e. expectations that stock prices will rise over the next six months, jumped 6.2% to 47.5%. This was the ninth time in the past 11 weeks and the 11th in the last 15 weeks that optimism was above the historical average of 39.0%. Bearish sentiment, i.e. expectations that stock prices will fall over the next six months, increased 0.1% to 25.1%. This was the 10th consecutive week and the 12th out of the past 14 weeks that bearish sentiment came in below the historical average of 30.5%. According to AAII, though pessimism is below average, concerns about the pace of economic growth, elevated stock valuations and the lack of a long-term fiscal solution have not gone away. As markets tend to climb a “wall of worry” the underlying pessimism suggests that near term sentiment shouldn’t be considered a headwind.

The Week Ahead:  The U.S. equity markets will close early on Tuesday (1:00ET) and all U.S. financial markets will be closed on Wednesday, Christmas Day.  The economic calendar will be relatively light this week with only a handful of notable reports. On Monday, November personal income and spending and the University of Michigan’s final December consumer confidence survey will be released. Tuesday will feature November durable goods orders and November new home sales. Weekly initial jobless claims will be released on Thursday morning.  On the earnings front, no S&P 500 member companies are scheduled to report this week.

This will be the last Weekly Viewpoint for 2013. Publication will resume on Monday, January 6, 2014. Please have a safe and happy holiday season. – Mike Schwager


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.

American Association of Individual Investors – AAII is a non-profit, membership-driven investor education organization. The American Association of Individual Investors (AAII) was founded in 1978 by James Cloonan. The AAII's mission is to teach individuals to manage their own portfolios and to beat average S&P 500 returns, while taking on lower-than-average levels of risk. AAII also publishes the results of its weekly investor confidence surveys that are based on its members' feelings about where the stock market is headed.

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.

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