The Cold Shoulder towards Equities Begins to Defrost

The Dow Jones Industrial Average (Dow) rose 0.61%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.57%, the Standard & Poor’s 500® Index (S&P 500) gained 0.81% and the NASDAQ Composite Index (NASDAQ) tacked on ...

February 10, 2014    |    By Mike Schwager

Performance for Week Ending 2/7/14:

The Dow Jones Industrial Average (Dow) rose 0.61%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.57%, the Standard & Poor’s 500® Index (S&P 500) gained 0.81% and the NASDAQ Composite Index (NASDAQ) tacked on 0.54%. Sector breadth was positive with 8 of the 10 S&P sector groups finishing higher. The Consumer Discretionary (+1.93%) was the best performing sector while Telecom (-2.45%) was the worst.

Index* Closing Price 2/7/2014 Percentage Change for Week Ending 2/7/2014 Year-to-Date Percentage Change Through 2/7/2014





Wilshire 5000




S&P 500








*See below for Index Definitions


The major market indices finished the week modestly higher. Trading however was very choppy with the S&P posting the worst day of the year on Monday (-2.8%) followed by the best day of the year on Friday (+1.3%). Increased levels of volatility have become the norm so far this year as investors try to gauge what is discounted in the market and what is likely to come to fruition in the weeks/months ahead.

One encouraging sign was the market’s ability to rise in the face of the weak payroll report on Friday, suggesting that the emotional pendulum may have swung too far into the ‘fear’ camp over the past several weeks. To wit, the American Association of Individual Investors (AAII) reported last week that bullish sentiment in the most recent period fell to 27.9%, the lowest level since last April and about half of what it was at the start of the year. Bearish sentiment jumped to 36.4%, the highest level since late-August. The spread between bulls and bears has now been negative for two-consecutive weeks, a development that has often been a precursor to a near term bottoming process.

My job as a strategist is to try and capture the disconnect between perception and reality.  In the current environment this means the ability to separate the emotional aspects of what is going on in areas like the emerging markets from the underlying macro drivers in the U.S. While emotions (fear & greed) tend to play a large part in investment decisions, they also tend to be contrarian in nature. In other words, investors tend to be the most fearful (bearish) at market bottoms and the greediest (bullish) at market tops. I believe fundamentals can only be ignored for so long. The macro environment of improving economic conditions, strong corporate profitability, favorable monetary policy, attractive valuation, and muted inflation, all remain in place and should continue to provide a favorable foundation for additional upside in the markets. While negative headline risk will certainly still exist, rallies in the face of bad news is often a good sign – stay tuned.

Payroll Report:  On Friday, the Labor Department reported that nonfarm payrolls rose by a disappointing 113K – well below the 180K expected by economists. The unemployment rate fell to 6.6% (from 6.7%) while private payrolls—which filter out government hiring/firing—rose by a weaker than expected 142K. While the shortfall will likely raise some doubt about the strength of the U.S. recovery, it is worth noting that month to month changes in the payroll report are notoriously volatile. Therefore, it may be best to give this indicator a little room—especially when weather conditions are taken into account—before making a broader call on the labor markets. In addition, “other” labor market reports have not been nearly as weak as the monthly jobs data. Last week, ADP reported that U.S. corporations added an estimated 175K jobs during the month of January on top of the 227K added during December. The ISM nonmanufacturing report showed service industry employment further expanding during the month while weekly initial jobless claims averaged 333K during January, a downtick from the 358K average in December.

The Week Ahead:   
Earnings season will continue to wind down this week with approximately 60 members of the S&P 500 scheduled to report earnings. On the economic front, the focal report will come Thursday when January retail sales will be reported. Other reports of interest include December business inventories, December industrial production and capacity utilization, the preliminary University of Michigan consumer sentiment survey, and January import and export prices. Federal Reserve (Fed) Chairman Janet Yellen will give her first semi-annual monetary testimony to Congress on Tuesday and Thursday. Other Fed speakers of note include Philadelphia Fed president Charles Plosser on Tuesday and St. Louis Fed president James Bullard on Wednesday.

Despite a rocky start for the U.S. markets, I continue to believe they remain poised to move higher during the course of the year, although the pace of gains is likely to be more muted relative to 2013. While setbacks could occur along the way, the stage appears set for the market to deliver a solid performance reflecting a combination of multiple expansion and corporate profit growth, as well as an expected increase in equity portfolio flows.

The U.S. economy is expected to continue to gain traction, reflecting the ongoing gradual recovery in the housing sector, falling energy prices and reduced fiscal headwinds. While consensus expectations are for near 3% GDP growth in 2014, the risk appears to be skewed to the upside. Pent-up demand resulting from the huge gap in household formation over the prior several years should continue to buoy the housing market. The sector may also benefit from the rising cost of renting and the still-attractive level of mortgage rates. Gradual loosening of lending standards could also become a tailwind. A pickup in global demand would bode well for the U.S. manufacturing sector. While the sector has been shrinking since the mid-1960s and currently accounts for only about 12% of U.S. GDP, it is well positioned to expand as a result of lower operating costs due to improvements in productivity, new investments and declining energy and commodity prices. In addition, U.S. corporations are bringing jobs back home as rising overseas labor costs, a more competitive U.S. labor force and the expense of shipping have all diminished the economic benefits of outsourcing. The consumer segment of the economy should continue to benefit from an increase in net worth resulting from the rebound in housing and asset prices. This increase in “wealth” has recently boosted retail sales and consumer sentiment measures, suggesting consumers could continue to ramp up their consumption during 2014.

While the outlook for the domestic markets remains favorable, attractive relative valuation and improving macro conditions should set the stage for even higher returns out of the Eurozone. European risk assets should also benefit from reduced fiscal headwinds, supportive monetary policy and an uptick in economic growth. With the prospect of better economic growth, the diminishing threat of a Eurozone debt crisis, and the investor-friendly European Central Bank, patient investors are likely to be rewarded over the coming years.


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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

Michigan Consumer Sentiment Index - MCSI
A survey of consumer confidence conducted by the University of Michigan. The Michigan Consumer Sentiment Index (MCSI) uses telephone surveys to gather information on consumer expectations regarding the overall economy.

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.

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 gua rantees 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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