/perspectives/weekly-viewpoint/the-rally-resumes

The Rally Resumes

The major market indices rebounded nicely from the prior week’s losses and have now finished higher in seven of the past eight weeks. Gains over the period have been driven by signs of economic stabilization in China, hints of more monetary easing in Europe, and growing comfort with the likelihood that the Federal Reserve will begin raising rates next month.

November 23, 2015    |    By Mike Schwager

Performance for Week Ending 11/20/15:

The Dow Jones Industrial Average (Dow) rose 3.35%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 3.11%, the Standard & Poor’s 500 Index (S&P 500) gained 3.27% and the Nasdaq Composite Index (NASDAQ) tacked on 3.59%. Sector breadth was positive with all 10 of the S&P sector groups finishing higher. The Consumer Discretionary (+4.52%) led the way higher followed by Technology (+4.28%) and Telecom (+3.24%).

Index* Closing Price 11/20/2015 Percentage Change for Week Ending 11/20/2015 Year-to-Date Percentage Change Through 11/20/2015
Dow 17823.81 +3.35% 0.00%
Wilshire 5000 21481.19 +3.11% +0.90%
S&P 500 2089.17 +3.27% +1.47%
NASDAQ 5104.92 +3.59% +7.79%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 11/16/15 – 11/20/15

The major market indices rebounded nicely from the prior week’s losses and have now finished higher in seven of the past eight weeks. Gains over the period have been driven by signs of economic stabilization in China, hints of more monetary easing in Europe, and growing comfort with the likelihood that the Federal Reserve will begin raising rates next month.

Recent data has bolstered the case for raising rates for the first time in almost a decade, with the October payroll data showing the sharpest increase in hiring this year. According to Bloomberg data, investors are now pricing in a 70% probability that the Fed will raise rates next month. The October FOMC meeting minutes on Wednesday also strongly hinted that a hike is on the table. As stated in the minutes “while no decision had been made, it may well become appropriate to initiate the normalization process at the next meeting.” 

Uncertainty surrounding the timing of the initial lift-off in rates has been a substantial headwind to the markets over the past few months. If the Fed does move in December, the debate will then turn from “when” to “how fast, how high.” Clarity and assurance that the path forward will be very gradual has almost become a prerequisite for the market to make a sustainable move higher, in my opinion. Bloomberg data shows that investors are currently betting that the second hike won’t come until the June meeting. The time gap between the initial rate hike and the second hike will be critical in gauging just what the Fed means by “gradual.”  The market seems to be ready for the “normalization” process to begin and confidence that a rate hike is certain and imminent and the pace higher will be very gradual could become a catalyst for another leg up in prices.

While the Fed is gearing up to begin the tightening process, the European Central Bank (ECB) is likely to expand its stimulus efforts. In a speech on Friday morning, ECB President Mario Draghi telegraphed that further stimulus is likely to be announced at the next ECB meeting (December 3) to help counter the weak inflationary environment. Through its quantitative easing program, the ECB is currently buying 60 billion euros a month of bonds and intends to do so through at least September 2016. Speculation has been growing that the pace of buying could be increased and that the timing may be extended into 2017.

Looking out over the coming months, the path of least resistance for stocks still appears to be higher.  While there will certainly be potholes and speed bumps along the way, the macro environment should remain supportive for additional price appreciation in both U.S. and European equities.

The Week Ahead:
The data calendar will be front end loaded in the upcoming week due to the Thanksgiving Day holiday (Note: markets will be closed on Thursday and will close at 1:00ET on Friday). Economic reports of interest include existing home sales, the first revision to third-quarter GDP, the Case-Shiller Home Price index, the Conference Board's November Consumer Confidence survey, October durable goods orders, personal income and spending, weekly jobless claims, new home sales, and the University of Michigan's consumer sentiment survey. The earnings calendar continues to wind down with just 14 members of the S&P 500 scheduled to report results. Other data/events of interest include Black Friday sales numbers and weekly oil inventories from the Energy Information Administration 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.

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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