/perspectives/weekly-viewpoint/the-grind-higher-continues

The Grind Higher Continues

The Dow Jones Industrial Average (Dow) rose  1.56%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.03%, the Standard & Poor's 500 Index (S&P 500) gained 1.98% and the Nasdaq Composite Index (Nasdaq) tacked on 1.82%.

May 20, 2013    |    By Mike Schwager

Performance for Week Ending 5/17/13:

The Dow Jones Industrial Average (Dow) rose  1.56%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 2.03%, the Standard & Poor’s 500 Index (S&P 500) gained 1.98% and the Nasdaq Composite Index (Nasdaq) tacked on 1.82%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Financials sector (+3.68%) led the way higher followed by Industrials (+2.21%) and Technology (+2.02%).

Index* Closing Price
5/17/2013 
Percentage Change for
Week Ending 5/17/2013
Year-to-Date Percentage
Change Through 5/17/2013

Dow

15354.40

+1.56%

+17.17%

Wilshire 5000

17269.27

+2.03%

+17.00%

S&P 500

1666.12

+1.98%

+16.82%

NASDAQ

3498.97

+1.82%

+15.88%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 5/13/13 - 5/17/13

The major market indices finished higher for a fourth consecutive week as investors continued to pile into equities despite a batch of weaker than expected economic data.  The markets resiliency, despite some minor (though likely temporary) cracks in the economic data, likely underscores investor confidence that the monetary environment will remain supportive and the Fed will continue to provide a “safety net” in the event the economic cracks begin to widen.

Interestingly, the growing faith in the Fed is occurring at a time when signs of division amongst Fed members are emerging in regards to the need to start “tapering” the Fed’s bond buying activity.  Last week the heads of the Philadelphia, Dallas, and Richmond Federal Reserve Banks all suggested bond buying should be tapered immediately while Boston Fed President Rosengren maintained his stance in favor of the purchases. Of particular note is San Francisco Fed Chief John Williams, who said the Fed could reduce the pace of asset purchases "perhaps as early as this summer."

Yellow Flags…
Wal-Mart, long viewed as a bellwether for the economic health of middle America, announced last week that second quarter results will fall short of current expectations.   The company cited the pinch from higher payroll taxes and the sluggish US economy as the primary reasons for the lower guidance.  Other “yellow flags” included a 32K jump in initial jobless claims to the highest level in six weeks, signs of contraction in the manufacturing sector in both the greater- Philadelphia and New York regions, and a 16.5% plunge in housing starts during the month of April.

...Versus Green Flags
There were also some positive data releases last week including a sharp uptick in the University of Michigan consumer confidence data and a report from the National Federation of Independent Business’s (NFIB) that showed confidence among U.S. small businesses climbed in April to a six-month high as the outlook for the economy and sales brightened.  The report spurred optimism that improving confidence amongst small businesses may lead to an uptick in hiring intentions. Two inflation reports (the consumer and producer price indexes) from the Labor Department showed that pricing pressure remained muted during the month of April.

Investor sentiment (a contrarian indicator) also remains supportive.  With stocks at all-time highs, the most recent AAII Investor Sentiment Survey showed a 2.3 point decline in bulls to 38.5% and falling just below the long-term average of approximately 39% (i.e. bullish sentiment remains well below extreme levels that have in the past coincided with a near-term top).  Bearish sentiment gained 1.9 points to 29.3%, also just under the long-term average.   In addition, a worldwide poll of investors, analysts, and traders conducted by Bloomberg shows more than two thirds believe the U.S. economic recovery is "sustainable," while only a little over a quarter of those surveyed see a return to recession within the next two years. Key drivers of the upbeat forecast include increasing energy independence, rising home values, and a pause in partisan budgetary battles in Washington.

While the path of least resistance in the near term appears to be higher, I believe anemic trading volumes last week may be suggesting “buyer’s fatigue” and a growing reluctance amongst the masses to chase the markets higher. To wit, stocks have now gone 95 trading days without a 3-day losing streak.  In addition, it has been over six months since the market has had a 5% pullback.  The last 10%-plus correction took place in the summer of 2011 and the S&P is currently selling at over a 30% premium to its 200 day moving average – a larger premium than at the 2007 peak.

While the current advance seems to be getting a little long in the tooth, I feel the overall macro environment still remains conducive to further gains as the year progresses.  The price level of the market and the collective gains over the past few years are not what really matters, it’s the valuation of the market that ultimately determines if the market is rich or cheap.  Despite more than doubling off the March 2009 lows, the markets valuation remains below its long term average and well off the levels reached at the 2000 and 2007 market peaks. In addition, relative valuation to bonds is also compelling.  For example the markets earnings yield using the consensus earnings estimate ($112.94) for the next twelve months is 6.7% (earnings/price).  This compares to the paltry 1.95% yield on the 10-year Treasury bond.  According to USA Today, the difference between the earnings yield and Treasury yield is at the widest margin since the mid-1950s. In addition, at over three times the Treasury yield, the earnings yield is well above the 1.6 times average since World War II.

The Week Ahead
First-quarter earnings season continues to wind down with the final two Dow components, Home Depot and Hewlett-Packard, scheduled to report this week.  Several major retailers are also scheduled to report quarterly results including Target, Lowe’s, The Gap, Abercrombie, Best Buy and TJX Companies.  The economic calendar slows a bit this week with the focal reports being existing home sales (Wed), new home sales and initial jobless claims (both on Thursday) and durable goods orders on Friday. Also of interest will be Wednesday’s release of the FOMC Meeting minutes from April 30/May 1 meeting. There are a handful of Fed speeches on the docket including Fed Chairman Ben Bernanke’s testimony on the economic outlook to the Joint Economic Committee on Wednesday.


Definitions

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.

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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