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

The Rally Continues

The major market indices finished the week higher with both the Dow and S&P closing at new all time highs. The gains marked the fifth consecutive week the broader indices closed higher. Money tends to be selfish as it almost always flows to the best return opportunities.

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November 24, 2014    |    By Mike Schwager

Performance for Week Ending 11/21/2014:

The Dow Jones Industrial Average (Dow) gained 0.99%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.06%, the Standard & Poor’s 500® Index (S&P 500) finished up 1.16% and the NASDAQ Composite Index (NASDAQ) tacked on 0.52%. Sector breadth was positive with 9 of the 10 S&P sector groups finishing higher. The Materials sector (+2.76%) led the way followed by Energy (+2.50%) and Utilities (+1.70%).

Index* Closing Price 11/21/2014 Percentage Change for Week Ending 11/21/2014 Year-to-Date Percentage Change Through 11/21/2014

Dow

17810.06

+0.99%

+7.44%

Wilshire 5000

21293.37

+1.06%

+10.59%

S&P 500

2063.50

+1.16%

+11.64%

NASDAQ

4712.97

+0.52%

+12.84%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/17/2014-11/21/2014

The major market indices finished the week higher with both the Dow and S&P closing at new all time highs. The gains marked the fifth consecutive week the broader indices closed higher. Money tends to be selfish as it almost always flows to the best return opportunities. With slowing growth in Europe, Japan and China, investors appear to be gravitating to the U.S. markets reflecting the favorable economic growth, supportive monetary conditions, rising consumer confidence, and solid underlying earnings growth.

Markets also benefitted from a building wave of global monetary stimulus. Following the recent increase in quantitative easing by Japan, China announced a surprise cut in interest rates—the first in over two years—amid  signs its economy is slowing. The European Central Bank (ECB) is also expected to do more following dovish commentary from ECB President Draghi last week. Speaking at a banking conference in Frankfurt on Friday, Draghi sent a strong signal that the central bank is ready to "step up the pressure" and expand its stimulus programs if inflation fails to show signs of quickly returning to the ECB's target.

In light of the recent move higher, the price to earnings (P/E) multiple on the S&P 500 has expanded to 17.2 times the consensus forecast for 2014 earnings. However, using forward expectations, the market is trading at a more reasonable 15.8x and 14.2x consensus earnings forecasts for 2015 and 2016, respectively. Historically there has been an inverse correlation between the market’s P/E multiple and the level of inflation and interest rates. With both interest rates and inflation at muted levels, valuation seems reasonable to slightly cheap, especially on a forward basis.

Economic Roundup
Last week’s economic data underscored that the U.S. economy remains on firm footing. On the manufacturing front, the Philadelphia Federal Reserve (Fed) reported that manufacturing activity in the greater-Philly area surged in November to the highest level since 1993. Earlier in the week, the NY Fed also reported that manufacturing in the New York area expanded during the month. Labor conditions continue to improve with initial jobless claims coming in below 300K for the 10th consecutive week – a trend not seen since 2000. On the housing front, the National Association of Realtors reported that existing home sales in October rose to the highest level in a year reflecting cheap funding costs and the improving labor markets. The annualized reading of 5.26 million units marked the fifth consecutive month that the sales pace topped 5 million units.  Elsewhere, homebuilder sentiment increased, mortgage applications rose and building permits—which tend to be a leading indicator of future construction—rose to the highest level in six years.

The Week Ahead:
The U.S. financial markets will be closed on Thursday in observance of Thanksgiving. On Friday, the U.S. equity markets will close early, at 1:00 p.m. ET. Earnings season will continue to wind down with just seven members of the S&P 500 scheduled to report during the week. Despite the holiday shortened week, the economic calendar will be jam packed with nearly all of the notable economic data being released on Tuesday and Wednesday. Reports of interest include the first revision to third-quarter GDP, the September Case-Shiller home price index, the Conference Board’s November consumer confidence index, October durable goods orders, October personal income and spending, October new home sales, October pending home sales and weekly jobless claims. Other events of interest include the OPEC meeting on Thursday and sales figures coming out of Black Friday – the official kickoff to the U.S. holiday shopping season.


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.

S&P/Case-Shiller Home Price Indices measure the residential housing market, tracking changes in the value of the residential real estate market in 20 metropolitan regions across the United States. These indices use the repeat sales pricing technique to measure housing markets. First developed by Karl Case and Robert Shiller, this methodology collects data on single-family home re-sales, capturing re-sold sale prices to form sale pairs. This index family consists of 20 regional indices and two composite indices as aggregates of the regions.

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 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.

 

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