Wake Me up When September Ends
The major market indices finished the holiday shortened week to the downside reflecting growing speculation the Federal Reserve could tighten policy sooner than expected.
September 12, 2016
| By Mike Schwager
Performance for Week Ending 9/9/16:
The Dow Jones Industrial Average (Dow) fell 2.20%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 2.33%, the Standard & Poor’s 500 Index (S&P 500) finished off 2.39% and the Nasdaq Composite Index (NASDAQ) shed 2.36%. Sector performance was negative with 9 of the 10 S&P sector groups finishing lower. The Energy sector (+0.66%) was the best performer while Consumer Staples (-3.87%) was the worst.
||Closing Price 9/9/2016
||Percentage Change for Week Ending 9/9/2016
||Year-to-Date Percentage Change Through 9/9/2016
*See below for Index Definitions
MARKET OBSERVATIONS: 9/5/16 – 9/9/16
The major market indices finished the holiday shortened week to the downside reflecting growing speculation the Federal Reserve could tighten policy sooner than expected. Seasonals were also likely at play as September tends to be the worst month of the year for the equity market. According to Bloomberg data, over the past 30 years the S&P 500 has fallen by an average of 0.67% during the month.
The recent hiccup in economic data (Payrolls, ISM Manufacturing), had lowered the odds of a rate hike at the upcoming (September 20/21) Federal Open Market Committee Meeting (FOMC), however, an uptick in hawkish commentary from several Fed members and the last minute addition of Fed Governor Lael Brainard to the coming week’s speaking calendar, seem to have put September back in play. Brainard has been an uber dove and if she appears to change sides by switching to a more hawkish tone, September may be back on the table. According to fed funds futures, the odds that the Fed will hike at this month’s meeting jumped to 32% on Friday (from 22% on Wednesday). While the market odds currently suggest that a move in September remains low, it appears the Fed may be trying to raise market expectations and in turn, give themselves the optionality to move if the data warrants. The probability of a hike at the December FOMC meeting has moved higher with the most recent reading at nearly 62%.
Other factors impacting last week’s performance included disappointment that European Central Bank President Draghi downplayed the need for more near-term economic stimulus in the Eurozone and a sell down in technology-bellwether Apple as investors appeared underwhelmed by the rollout of its revamped product lineup. On the flip-side, the Energy sector finished the week higher driven by a solid rebound in oil prices after the Department of Energy reported that crude inventories fell by 14.5 million barrels, the largest drawdown since January 1999.
Economic Round-up: Last week’s economic calendar was relatively light, although the one report that stood out was the Institute for Supply Management’s non-manufacturing index, which fell well short of expectations. The report which is viewed as a benchmark for the services side of the economy, slumped to 51.4, the lowest level since February 2010. While a reading above 50 still suggests the services side of the economy is expanding, the “guts” of the report were worrisome as the forward looking new orders component falling to the lowest level since December 2013. Elsewhere, layoffs trends continue to moderate with the Labor Department reporting that weekly jobless claims fell to the lowest level in seven weeks. The four-week average—which helps smooth the week-to-week volatility—fell to 261.3K, close to the lowest level since 1973.
Market View: The path of least resistance over the coming quarters for the domestic equity markets should continue to be skewed to the upside. While a pullback in stock prices in the coming weeks certainly cannot be ruled out, a correction in prices would be viewed as healthy as it would help relieve some of the current “froth” in the market and set the stage for a buying opportunity at better prices. From a macro standpoint, the US economy remains healthy, labor conditions continued to improve, the likelihood of a recession remains relatively low, earnings growth is set to accelerate in the coming quarters and interest rates policy is expected to remain supportive of risk assets.
The Week Ahead: The data calendar will be back end loaded with the bulk of the reports due out on Thursday and Friday. Reports of interest include the August Producer Price Index (PPI), August retail sales, the Philadelphia Fed’s September business outlook survey, the September Empire State manufacturing survey, August industrial production, July business inventories, the August Consumer Price Index (CPI) and the University of Michigan’s September consumer sentiment survey. Earnings reports will be minimal with only one member of the S&P 500 scheduled to report results. On the Fed front, three Fed Heads are set to speak on Monday, including Lockhart, Kashkari, and Brainard.
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 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.
Global CIO Scott Minerd and Head of Macroeconomic and Investment Research Brian Smedley provide context and commentary to complement our recent publication, “Forecasting the Next Recession.”
In his market outlook, Global CIO Scott Minerd discusses the challenges of managing in a market melt up and highlights several charts from his recent piece, “10 Macro Themes to Watch in 2018.”
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