The ‘Bernanke Bounce’ Continues

Performance for Week Ending 9/14/12: The Dow Jones Industrial Average (Dow) gained 2.15%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.02%, the Standard & Poor's 500® Index (S&P 500) rose by 1.94% and the NASDAQ Composite Index (NASDAQ) tacked on 1.52%. Sector breadth was positive as 8 of ...

September 17, 2012    |    By Mike Schwager

Performance for Week Ending 9/14/12:

The Dow Jones Industrial Average (Dow) gained 2.15%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.02%, the Standard & Poor's 500® Index (S&P 500) rose by 1.94% and the NASDAQ Composite Index (NASDAQ) tacked on 1.52%. Sector breadth was positive as 8 of the 10 S&P sector groups finished higher. The Energy sector (+4.06%) was the best performer, while the Utilities sectors (-0.32%) was the laggard.

Index* Closing Price 9/14/12 Percentage Change for Week Ending 9/14/12 Year-to-Date Percentage Change Through 9/14/12





Wilshire 5000




S&P 500








*See Last Page for Index Definitions

MARKET OBSERVATIONS: 9/10/12 - 9/14/12

The major market indices finished the week solidly higher after the Federal Reserve (FED) announced a new round of bond buying (QE-3) and the German Constitutional Court ruled favorably on the legality of the European Stability Mechanism (ESM), therefore allowing Germany to contribute to the bailout fund.

Equity markets have been in rally mode over the past couple months in anticipation of these events coming to fruition.  While momentum can surely take the markets higher, it is becoming tough to get overly optimistic from current levels in light of still sluggish economic growth, slowing corporate revenue and earnings growth, the struggling Eurozone, and the looming fiscal cliff.  While additional stimulus will essentially help create an insurance policy for some of the items just mentioned, the fact that the changes in monetary policy work with a significant lag, the impact on the economy will not likely be evident for quite some time.  In addition, we need to be cognizant of the fact that oil is within striking distance of $100 per barrel, geopolitical tensions in the Middle East are beginning to flare up and the caustic environment in Washington likely means there will be no near-term solution to the pending fiscal cliff.  Bottom-line, with the S&P up better than 14% since early June, unless we see signs of near term improvement on the economic and/or fiscal front, the probability of a near term “pause to refresh” seems high, in my opinion.

FOMC Refills the Punch Bowl:
Last week, the two day Federal Open Market Committee (FOMC) meeting concluded with the committee announcing a new round of bond buying (“quantitative easing”) as well as committing to holding the federal funds rate near zero through mid-2015 (“verbal easing”).  The Fed said they will expand their holdings of long-term securities with open-ended purchases of mortgage debt to the tune of $40 billion per month.  In addition, they will continue the current program—dubbed Operation Twist—through year-end by extending the duration of the Fed’s debt holdings through the swapping of short-term debt for longer-term securities.  By pumping additional liquidity into the markets, the Fed is attempting to bring lending rates lower and boost asset prices, which in turn should help jumpstart growth and reduce the rate of unemployment over time.

European Bailout Fund:
The German Constitutional Court ruled that Germany's participation within the European Stability Mechanism (ESM) is within its constitutional rights. In doing so, the courts removed a major question mark surrounding the Eurozone and paved the way for the creation of the permanent bailout fund.  This is important, as Germany’s contribution ($190B euro) represents almost 40% of the total value of the fund ($500B euro).  The establishment of the ESM and the European Central Bank’s (ECB’s) recent open ended bond buying commitment, while not a panacea for what ails the Eurozone, should eliminate the potential for “tail risk” and help lower funding costs for countries like Spain and Italy.

Economic Round-Up:
Economic data continues to hint at very modest growth.  Last week, the Commerce Department reported that Retail Sales during the month of August rose by a better than expected 0.9%.  Sales excluding Autos rose by 0.8% also slightly better than expected.  Outside of a strong gain in car sales and a price-related surge in gasoline sales, overall sales were fairly tame rising by only 0.1%.  “Core” retail sales, which exclude autos, gasoline, and building materials, actually fell 0.1% after a 0.8% increase in July. Meanwhile, the Labor Department reported that both consumer and producer prices remain in check. On the labor front, initial jobless claims during the week ended September 8th rose by 15K to 382K – ahead of the 370K expected by economists.  The four-week moving average—which helps smooth the week to week volatility—rose to 375K – the highest reading since mid-July. Lastly, the University of Michigan reported that consumer sentiment unexpectedly rose in September.  The gain likely reflected the recent rise in stock prices and the stabilization in the housing market.   

The Week Ahead:
The economic calendar will take center stage in the upcoming week with reports due out on regional manufacturing, housing, jobless claims and leading indicators. Third quarter earnings season will remain on the back burner for a few more weeks. In the interim, investors will pay close attention to earnings guidance from company management, with a particular focus on how slowing global growth is impacting business conditions. Fed heads will be out and about this week with upwards of a dozen speeches on the docket.  Investors will likely pay close attention to these speeches for additional insight into the FOMC’s decision to initiate a third round of quantitative easing. This week also marks quarter-end options expiration, potentially leading to a choppy trading environment.


I continue to believe that the U.S. equity markets remain well positioned for positive performance over the course of the next few quarters, especially relative to cash and safe-haven Treasury bonds. This upbeat view reflects the markets attractive valuation, the overall healthy nature of corporate balance sheets, the recovering (albeit modestly) economy, expectations that corporate profits will remain favorable, and the pledge from the FED that monetary policy will remain accommodative through at least mid-2015. In light of these favorable dynamics, I continue to believe that bouts of market weakness represent an attractive entry point, especially for longer-term investors.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made.  An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


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.


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