Tapering Worries Trim Recent Gains

The Dow Jones Industrial Average (Dow) fell 1.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM ) lost 1.04%, the Standard & Poor's 500 Index (S&P 500) declined by 1.14% and the NASDAQ Composite Index (NASDAQ) shed 0.09%.

June 03, 2013    |    By Mike Schwager

Performance for Week Ending 5/31/13:

The Dow Jones Industrial Average (Dow) fell 1.23%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM ) lost 1.04%, the Standard & Poor’s 500 Index (S&P 500) declined by 1.14% and the NASDAQ Composite Index (NASDAQ) shed 0.09%. Sector breadth was negative as 8 of the 10 S&P sector groups finished lower. The Technology (+0.58%) was the best performer while Telecom (-5.03%) was the worst.

Index* Closing Price
Percentage Change for
Week Ending 5/31/2013
Year-to-Date Percentage
Change Through 5/31/2013





Wilshire 5000




S&P 500








*See below for Index Definitions

MARKET OBSERVATIONS: 5/27/13 - 5/31/13

The major market indices finished the week lower with the S&P posting its first back to back weekly decline this year. Volatility was elevated as investors appeared to be trying to handicap when the Federal Reserve (FED) will begin to “taper” their bond buying program. The market seems to have morphed into a phase where good economic news is being viewed in a negative light and weak news is being applauded. This shift likely reflects recent comments from FED Chairman Bernanke who said the FED could potentially taper its bond buying program "in the next few meetings" if the outlook for the economy continues to improve. Bernanke’s comments were echoed last week when Boston FED President Eric Rosengren—one of the more “dovish” members of the FED -- noted that a few more months of improvement in the labor markets would have him support a tapering in bond buying activity.

While FED officials may be trying to float a trial balloon to gauge the market’s reaction, precedence has now been set and reversing it may be like trying to unscramble an egg. In other words, even if the FED holds off from adjusting their bond buying program to year end, the markets will begin to discount the action. This was clearly evident in the Treasury market where the yield on the benchmark 10-year Treasury moved to the highest level in over a year (note: bond prices and yields move in opposite directions).

Looking forward, I believe market activity over the coming weeks will likely be very data dependent with a particular focus on labor related metrics. This will surely put this Friday’s Payroll report in the spotlight. According to Bloomberg, nonfarm payrolls are expected to rise by 165K while the unemployment rate is expected to remain steady at 7.5%. Private payrolls—which filter out government hiring and firing—are expected to expand by 175K.

I believe at this juncture it is also very important to distinguish between tighter monetary policy and the “normalization” of policy. While concerns over “tapering” are rising, tapering is not tightening; it just means the FED will be adding liquidity into the markets at a lesser rate. In addition, we also need to be cognizant that the FED is likely to ease up on the monetary gas pedal in reaction to a strengthening of the underlying economy – which ultimately should be beneficial to the equity markets.

They Didn’t Sell in May – At least Not Stocks
The “sell in May” trend didn’t hit the equity markets this year; however other asset classes weren’t so fortunate. For example, while the S&P 500 closed up 2.1% during May, the 10-year Treasury fell 2.4% and Gold lost 6%. While investors appear to be breathing a sigh of relief that the equity markets made it through May unscathed, we must also remember that the “sell in May” adage reflects a broader, multi-month strategy. As pioneered by the Stock Trader’s Almanac, the sell in May strategy highlights that since 1950; the market has generally performed better in the six month window of November through April, and has a tendency to post subpar results in May through October. So to quote another well worn Wall Street adage – “one month does not make a trend” – stay tuned.

The Week Ahead
The focal point of the upcoming week will be Friday’s payroll data. While payroll report is always closely watched it will likely take on added emphasis in light of the FED’s focus on the labor market. Other economic reports of interest include construction spending, manufacturing and non-manufacturing data from the Institute of Supply Management (ISM), monthly auto sales and initial jobless claims. The earnings calendar will remain in the background with only four members of the S &P 500 scheduled to report results. FED Heads will be out and about with a handful of speeches on the docket. Other events of interest include the FED’s Beige Book report on Wednesday and the European Central Bank meeting on Thursday morning.


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.

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