Third Straight Weekly Decline, but Weakness Looking Overdone
The Dow Jones Industrial Average (Dow) fell 2.74%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 3.36%, the Standard & Poor’s 500® Index (S&P 500) finished off 3.14% and the NASDAQ Composite Index (NASDAQ) shed 4.45%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Energy sector (-5.03%) led the way lower followed by Industrials (-4.69%) and Materials.
October 13, 2014
| By Mike Schwager
Performance for Week Ending 10/10/2014:
The Dow Jones Industrial Average (Dow) fell 2.74%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 3.36%, the Standard & Poor's 500® Index (S&P 500) finished off 3.14% and the NASDAQ Composite Index (NASDAQ) shed 4.45%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Energy sector (-5.03%) led the way lower followed by Industrials (-4.69%) and Materials (-4.54%).
||Closing Price 10/10/2014
||Percentage Change for Week Ending 10/10/2014
||Year-to-Date Percentage Change Through 10/10/2014
*See below for Index Definitions
MARKET OBSERVATIONS: 10/6/2014-10/10/2014
The major market indices finished lower for a third consecutive week on growing concern over the health of the global economy. Trading was very volatile with the market see-sawing between sharp gains and losses throughout the week. The primary culprit for the recent weakness seemed centered on the latest batch of economic data out of Germany (the Eurozone’s largest economy). The data suggested the German economy has hit a rough patch which in turn is raising the prospect for further weakness in the overall Eurozone economy. Also adding to the negative tone were concerns over how the recent strength in the U.S. dollar will impact Q3 earnings.
The concerns over global growth can best be seen in the price of oil. During the week, oil fell to a low of $83.59 per barrel, the lowest level in over two years, as investors bet slowing economic growth will weigh on demand. Also adding to the downside pressure is the growing levels of supply coming from the U.S. shale sector as well as the strength in the U.S. dollar (note: oil is priced in dollars, as such, a stronger dollar makes oil more expensive for foreign buyers). The flip side to lower oil prices is they lessen the “tax” on consumers through lower gasoline prices. After peaking at $3.69 per gallon in late-April, the average price of regular unleaded gasoline has fallen to $3.24/gallon. According to the Energy Information Administration, last year about 134.5 billion gallons of gasoline were consumed in the United States. If current prices are sustained this would equate to a substantial savings for consumers. In addition, since gasoline is a high frequency purchase a pullback in prices should also bode well for consumer confidence as we enter into the all important holiday selling season.
The Key to Investing Is Capturing the Disconnect Between Perception and Reality.
Despite the recent downturn in prices and the uptick in volatility, the broader narrative surrounding the “bull case” in the U.S. still appears intact: The U.S. economy continues to improve, earnings are growing, the Fed is committed to low interest rates, and overall market valuation remains fair. As noted a couple weeks back, only 20% of active fund managers are currently beating the market and the average equity hedge fund is up only about 3%. Anecdotal evidence also suggests that cash positions amongst active fund managers remain elevated. This underperformance coupled with elevated cash levels could limit additional downside risk as managers start putting cash to work, (“buy the dip”) in an effort to play catch-up heading into year-end.
FOMC Meeting Minutes
On Wednesday the Federal Reserve (Fed) released the minutes from the September 16/17 Federal Open Market Committee (FOMC) meeting. The minutes were much more cautious than expected and took on a much more “dovish” tone relative to expectations. While Fed officials noted that economic activity was expanding at a moderate pace and the risks to the outlook were broadly balanced, there were a number of concerns. In particular, the committee noted weak growth in China and Japan as well as the "persistent shortfall of economic growth and inflation" in the euro area, which could have adverse effects on the U.S. economy. Moreover, there were a number of comments about implications on U.S. inflation and exports from the recent strengthening in the U.S. dollar. Overall, the collective worry seemed to be added reason for the Fed to hold short-term interest rates near zero, even as the economy continues to improve.
Last week’s economic calendar was relatively light, although a couple reports did stand out. Firstly, the Labor Department reported that initial jobless claims during the week ended October 4, fell 1K to 287K, solidly better than the 295K forecast. The 4-week moving average—which helps smooth the week to week volatility—fell to 288K during the period, the lowest level in 8 years. Meanwhile, the Commerce Department reported that wholesale inventories in August rose 0.7% while the July data was revised to a 0.3% increase from an initially estimated 0.1% increase. Overall, the report suggests a stronger profile for inventory growth in Q3.
Earnings Season – So far, so Good
Third quarter earnings season kicked off in earnest last week and while it’s still very early to extrapolate the data, early results are looking promising. Through Friday, 29 members of the S&P 500 have reported quarterly results with overall earnings up by 9.3%. Of the 29 companies, 65.5% have beaten expectations while 24.1% have fallen short. The current “beat” rate sits modestly above the long-term average of 63%. For the overall quarter, analysts are expecting S&P 500 earnings to rise by 4.8% while revenues are forecast to expand by 4.2%.
The Week Ahead:
The earnings calendar will move to the front burner this week with more than 50 members of the S&P 500 scheduled to release results. Highlights include Intel Corp., JPMorgan Chase, Johnson & Johnson, Goldman Sachs and General Electric. The economic calendar will be quiet until Wednesday when the September Producer Price Index (PPI), September retail sales, and the October Empire State manufacturing survey are released. Other reports of interest during the remainder of the week include: the September industrial production and capacity utilization, the October Philadelphia Fed Survey, housing starts and building permits and the University of Michigan’s October consumer sentiment survey. On Wednesday, the Fed will release its periodic Beige Book which will provide us with anecdotal snapshots of business conditions in each of the 12 Fed bank districts. Five Fed officials will make public appearances, including Chicago president Charles Evans on Monday. Philadelphia president Charles Plosser, Kansas City president Esther George, St. Louis president James Bullard and Minneapolis president Narayana Kocherlakota will all speak on Thursday.
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.
Producer Price Index - PPI is a family of indexes that measures the average change in selling prices received by domestic producers of goods and services over time. PPIs measure price change from the perspective of the seller.
NY Empire State Index is an index based on the monthly survey of manufacturers in New York State – known as the Empire State Manufacturing Survey – conducted by the Federal Reserve Bank of New York. The headline number for the NY Empire State Index refers to the survey’s main index, which summarizes general business conditions in New York State.
Philadelphia Fed Survey is a business outlook survey used to construct an index that tracks manufacturing conditions in the Philadelphia Federal Reserve district. The Philadelphia Fed survey is an indicator of trends in the manufacturing sector, and is correlated with the Institute for Supply Management (ISM) manufacturing index, as well as the industrial production index.
Michigan Consumer Sentiment Index – MCSI is 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.
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