/perspectives/weekly-viewpoint/the-new-year-rally-continues

The New Year Rally Continues

The Dow Jones Industrial Average (Dow) rose 0.40%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.40%, the Standard & Poor’s 500® Index (S&P 500) gained 0.38% and the NASDAQ Composite Index (NASDAQ) tacked on 0.77%.

January 14, 2013    |    By Mike Schwager

Performance for Week Ending 1/11/13:

The Dow Jones Industrial Average (Dow) rose 0.40%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 0.40%, the Standard & Poor’s 500® Index (S&P 500) gained 0.38% and the NASDAQ Composite Index (NASDAQ) tacked on 0.77%. Sector breadth was mixed as 6 of the S&P sector groups finished higher while 4 finished lower. The Healthcare sector (+1.96%) was the best performing sector while Telecom (-1.98%) was the worst.

Index* Closing Price 1/11/2013 Percentage Change for Week Ending 1/11/2013 Year-to-Date Percentage Change Through 1/11/2013

Dow

13488.43

+0.40%

+2.93%

Wilshire 5000

15255.04

+0.40%

+3.36%

S&P 500

1472.05

+0.38%

+3.22%

NASDAQ

3125.64

+0.77%

+3.51%

*See Last Page for Index Definitions
 

MARKET OBSERVATIONS: 1/7/12 - 1/11/13

The major market indices finished the second week of the New Year modestly higher as the euphoria surrounding the fiscal cliff deal started to fade. As mentioned last week, while the relief rally following the decision was warranted, policymakers failed to address the larger issue of raising the debt ceiling. It turns out that failure to do so in the next several weeks could have much larger ramifications than going over the fiscal cliff. This reality seemed to offset the solid kick-off to fourth quarter earnings season and the favorable seasonal bias.

Earnings Season off to Good Start
Fourth quarter earnings season kicked off in earnest last week when Dow-component Alcoa reported results. Through Friday, 28 members of the S&P 500 have reported fourth quarter earnings with overall results up by 11.4% (ex-Financials earnings are up 4.5%).  Of the companies that reported, 71.4% have beaten expectations while 17.9% have fallen short. The current “beat” rate is solidly better than the 61% long-term average. While it’s obviously very early in the reporting season, early trends have been encouraging.

This week’s reports set a positive tone for the waterfall of releases expected over the next few weeks. According to Bloomberg, expectations for overall S&P 500 earnings growth for the quarter are relatively benign with analysts forecasting a year/year increase of only 2.5% (+0.4% ex-financials). The current estimate has been pared significantly from the 10.4% expected pace of growth forecast at the end of September. Paradoxically, muted expectations could prove a net positive for stock price performance as low expectations leave plenty of room for upside surprises. 

First 5 Trading Days:
According to the Stock Trader’s Almanac the first five trading days in January have a very solid track record of forecasting full year performance for the markets. Since 1950  when the S&P posts positive performance during the first 5 trading sessions, the markets went on to post positive full year results approximately 85% of the time with an average gain of roughly 14%. Last Tuesday marked the fifth trading day of 2013 – as of that day’s close the S&P 500 had gained 2.17% -- stay tuned.

Greed vs. Gravity
Last week the CBOE Volatility Index (VIX), which tends to be a good barometer of fear in the market, fell to the lowest level since mid-2007, suggesting investors have become very complacent.  While the “gloom and doom” headlines have mostly fallen off the front pages, there still remains a large amount of uncertainty surrounding the looming debt ceiling which in turn opens the door for negative consequences related to a policy mistake. As mentioned last week, the debt ceiling could prove more toxic than the fiscal cliff debate and failure to raise the limit could prove more catastrophic. While fully going over the fiscal cliff (higher taxes for almost everyone and sharp spending cuts) would have likely resulted in the U.S. economy falling into recession, failure to raise the debt ceiling could have global ramifications.

According to a recently published report by the Treasury Department, “If Congress fails to increase the debt limit the government would default on its legal obligations – an event unprecedented in American history. This would cause investors here and around the world to doubt, for the first time, whether the U.S. will meet its commitments. That would precipitate a self-inflicted financial crisis potentially more severe than the one from which we are now recovering.”

Another contrarian indicator that is starting to look a tad elevated is the level of bullish sentiment among investors. According to the weekly poll from the American Association of Individual Investors (AAII), the percent of investors who are BULLISH on the market’s outlook over the next 6 months has jumped to 46.45%, the highest reading since last February and moderately above the 20 year average of 40.4%. Remember investment decisions, in their simplest form, are made with emotions – fear & greed.  Sentiment tends to be a contrarian indicator as investors tend to be greedy (bullish) at market tops and the most fearful (bearish) at market bottoms. As opined by investment guru Sir John Templeton “bull markets are born in despair, grow amid skepticism, mature in optimism and die on euphoria.” 

China's Yin-Yang
Chinese officials reported last week that exports jumped by a much better than expected 14.1% in December compared to 2.9% in the prior month and the 5% estimate from economists. The report spurred hopes that global economic growth is beginning to gather momentum and that China is likely to experience a “soft” economic landing. The surge in Chinese exports was driven by robust demand from both the US and Europe. The “yang” of the story is that the recent economic strength in China and a reported uptick in inflation are also raising concern that the People’s Bank of China could refrain from additional accommodative efforts.

The Week Ahead:
News flow out of Washington will once again be watched very closely for clues on how policymakers will address the pending debt ceiling debate. The economic calendar will be chock full of market moving data including reports on inflation, housing, retail sales, regional manufacturing and consumer confidence. Earnings season will also continue to ramp up with 40 members of the S&P 500 scheduled to report this week followed by 90 in the following week. Other events of interest include almost a dozen appearances by Federal Reserve (FED) officials including Chairman Bernanke on Monday.

MARKET VIEWPOINT

While fiscal uncertainty will remain a near-term headwind, expectations of an eventual agreement on the debt ceiling should set the stage for higher asset prices. Domestic growth has been gaining traction reflecting the resiliency of the consumer and the improving labor market and housing sector. While the political “noise” will dominate the investment landscape in the near-term, equities remain attractive on a longer term basis reflecting the combination of attractive valuation, the overall healthy nature of corporate balance sheets and the commitment from the FED to maintain accommodative monetary policy for the foreseeable future.


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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