The ‘Buy the Dip’ Crowd Finally Emerges
The major market indices finished the week higher for the first time this year. The rebound reflected a jump in oil prices, central bank verbal intervention (on Thursday European Central Bank President Mario Draghi hinted at more stimulus) and quarterly earnings that are coming in better than feared.
January 25, 2016
| By Mike Schwager
Performance for Week Ending 1/22/2016:
The Dow Jones Industrial Average (Dow) rose 0.66%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 1.33%, the Standard & Poor’s 500 Index (S&P 500) added 1.41% and the Nasdaq Composite Index (NASDAQ) tacked on 2.29%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Telecom sector (+4.38%) led the way higher followed by Consumer Discretionary (+2.52%) and Technology (+2.42%).
||Closing Price 1/22/2016
||Percentage Change for Week Ending 1/22/2016
||Year-to-Date Percentage Change Through 1/22/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 1/18/16 – 1/22/16
The major market indices finished the week higher for the first time this year. The rebound reflected a jump in oil prices, central bank verbal intervention (on Thursday European Central Bank President Mario Draghi hinted at more stimulus) and quarterly earnings that are coming in better than feared. Sharply “oversold” conditions, extreme levels of pessimism (contrarian indicator), and signs that the macro environment, as described by many company CEOs, so far this earnings season is OK and certainly not as bad as the market is indicating, added to the positive tone.
Oil rebounded by a combined 21.1% on Thursday and Friday, and finished the week up 9.3%, following a report on Thursday from the Department of Energy that showed a slightly smaller build in inventories than a private sector forecast issued earlier in the week. Oil prices are expected to remain a wild card in the early part of this year. Guggenheim’s expectation is that oil prices will stay depressed in the near-term, and we still feel that a dip to the mid-$20/barrel level could occur at some point. With that said, Guggenheim’s macro team believes prices will begin to stabilize during the second half of the year with oil finishing in the $40-$45/brl range by year-end.
With market volatility at elevated levels, it’s also worth mentioning that markets and the economy are not the same thing. While the markets have been punished recently, the economic situation has held up fairly well. US labor markets continue to recover, wages are beginning to trend higher, the services side of the economy remains strong, auto sales are near record highs and consumer confidence remain strong. The markets also appear to be overlooking the benefits of lower energy prices. Last summer, gasoline prices were averaging around $2.80/gallon, today the average price is under $2/gallon. The drawdown in prices equates to a significant tax cut for US consumers and while lower prices tend to work with a lag, they should have a net positive impact on forward growth.
Q4 Earnings Round-up:
While it’s still early in the reporting season, overall Q4 earnings reports are coming in better than feared. According to Bloomberg, through Friday 73 members of the S&P 500 have reported results with just over 75% surprising to the upside. Reported earnings for the S&P are currently down 2.0% but are still tracking solidly better than the 7% decline expected at the start of reporting season. Analysts have modestly revised their expectations higher and now expect S&P 500 earnings to finish the quarter down 6.3%. As has been the case over the past few quarters, the Energy sector remains the biggest drag. When looking at expectations excluding the Energy sector, overall results are forecast to decline by just 0.5%.
The Week Ahead:
The two-day FOMC meeting (Tuesday & Wednesday) will be the focal point in the upcoming week. While no change in policy is expected, investors will listen for clues on how the recent market turmoil has impacted the timing and path of future rate hikes. Earnings reports will also be a major focus as more than 130 members of the S&P 500 are scheduled to report results. This group includes a dozen members of the Dow average. The data calendar will also be busy. Economic reports of interest include the Conference Board’s consumer confidence survey, the November S&P Case-Shiller housing price index, December new home sales, December durable goods orders, the first estimate of fourth-quarter GDP, and the University of Michigan’s January consumer confidence survey.
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.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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