/perspectives/weekly-viewpoint/weak-start-likely-to-prove-short-lived

Weak Start Likely to Prove Short Lived

The Dow Jones Industrial Average (Dow) fell 0.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.47%, the Standard & Poor’s 500® Index (S&P 500) dipped 0.54% and the NASDAQ Composite Index (NASDAQ) finished off...

January 06, 2014    |    By Mike Schwager

Performance for Week Ending 1/3/14:

The Dow Jones Industrial Average (Dow) fell 0.05%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) lost 0.47%, the Standard & Poor’s 500® Index (S&P 500) dipped 0.54% and the NASDAQ Composite Index (NASDAQ) finished off 0.59%. Sector breadth was negative with 8 of the 10 S&P sector groups finishing lower. The Energy sector (-1.45%) led the retreat lower followed by Utilities (-1.32%) and Telecom (-1.30%).

Index* Closing Price 1/3/2014 Percentage Change for Week Ending 1/3/2014 Year-to-Date Percentage Change Through 1/3/2014

Dow

16469.99

-0.05%

-0.64%

Wilshire 5000

19088.13

-0.47%

-0.86%

S&P 500

1831.37

-0.54%

-0.92%

NASDAQ

4131.91

-0.59%

-1.07%

*See below for Index Definitions
 

MARKET OBSERVATIONS: 12/30/13 - 1/3/14

The major market indices finished modestly lower during the holiday interrupted week reflecting year-end portfolio rebalancing and a general lack of liquidity as many investors were out of the office due to the holiday season.

Despite the lackluster market performance, economic data last week continued to suggest the economy remains on firm footing. The Institute for Supply Management (ISM) reported that manufacturing in December expanded for the seventh consecutive month. The “guts” of the report were also encouraging as the forward looking new orders component and the employment segment both showed solid month over month gains. For the fourth quarter the ISM index averaged 56.9 (readings above 50 signal expansion) the strongest quarterly showing since Q4 2011. Elsewhere, the Census Bureau reported that construction spending during November rose at a 1.0% month over month pace, the Labor Department reported that initial jobless claims fell to the lowest level in a month, and the Conference Board reported that U.S. consumer confidence ticked higher in December. The confidence index averaged 73.3 during 2013, the strongest reading since 2007 and well above the 2009 low of 45.2.

As January Goes, so Goes the Year?
With U.S. stocks posting broad-based losses on the first trading day of the New Year, expect to hear a lot of talk over the next week or so in regards to what a weak start means for the remainder of the year. According to WSJ MoneyBeat column, in 20 of the past 26 years (77%) the Dow has moved in the same direction for the year that it moved on the first day. This trend has occurred every year, in fact, since 2005. The correlation however is weaker for the S&P 500. That index has moved in the same direction as the first trading day in only 14 of the past 26 years (54%).

The venerable Stock Trader’s Almanac points out that the first five days of the year also hold some predictive power. Over the last 39 years when the first five trading days were positive, the market rose for the year in 33 occasions, an 85% accuracy rate. However, during Midterm Election years, this indicator has a spotty record—almost contrarian. In the last 16 Midterm years only eight years followed the direction of the First Five Days and only two of the last nine (2006, 2010). Stay Tuned.

Looking Back on 2013:
2013 was a banner year with the S&P 500 producing a total return (including dividend income) of 32.38%, the best performance since 1997. The primary drivers of the strong performance were growing confidence in the sustainability of the U.S. economic recovery, favorable corporate profit growth, supportive valuations, growing confidence that the Federal Reserve will maintain interest rates at low levels for the foreseeable future and positive inflows as investors rotated out of fixed income investments into equities.

On the sector level, Cyclicals—due to their leverage to the underlying economy--outperformed Defensives while the S&P Growth Index (+32.75%) edged the S&P Value Index (+31.97%).  On the asset class level, the S&P Small Cap Index (+41.31%) was the best performer followed by the S&P Mid Cap Index (+33.46%) and the Large Cap S&P 500 Index (+32.38%). 

Looking Ahead to 2014:
The U.S. equity markets remain poised to move higher during the course of the year, although the pace of gains is likely to be more muted relative to recent years. While a setback could occur in the early goings of the year, the stage is set for the market to deliver solid performance over the intermediate term reflecting a combination of modest multiple expansion and corporate profit growth, as well as, an increase in equity portfolio flows. 

The Week Ahead:  
The focal point in the upcoming week will be Friday’s Payroll report. According to Bloomberg data, consensus expectations are for nonfarm payrolls to rise by 195K while the unemployment rate is expected to hold steady at 7.0%. Private payrolls—which filter out government hiring/firing—are forecast to rise 195K. Other economic reports of note include the ISM non-manufacturing report, factory orders, initial jobless claims and the ADP employment change report. The earnings calendar will slowly come back into focus over the coming weeks. This week seven members of the S&P 500 are expected to report results followed by 31 and 74 members during the subsequent two weeks. Other events of note include the potential approval from the Senate for Janet Yellen to become Chairman of the Federal Reserve. The Fed is also scheduled to release the meeting minutes from the December 17/18 Federal Open Market Committee (FOMC) meeting on Wednesday. The meeting minutes are expected to give further details on the committee’s decision to start paring back its quantitative easing program.

 

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.

ISM Manufacturing Index is an index based on surveys of more than 300 manufacturing firms by the Institute of Supply Management. The ISM Manufacturing Index monitors employment, production inventories, new orders and supplier deliveries. A composite diffusion index is created that monitors conditions in national manufacturing based on the data from these surveys. 

S&P 500/Citigroup Growth Index is a market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks within the S&P 500 Index that exhibit strong growth characteristics. The S&P 500/Citigroup Growth Index is a numerical ranking system based on three growth factors and four value factors to determine the constituents and their weightings.

S&P 500/Citigroup Value Index is a market-capitalization-weighted index developed by Standard and Poor's consisting of those stocks within the S&P 500 Index that exhibit strong value characteristics. The S&P 500/Citigroup Value Index uses a numerical ranking system based on four value factors and three growth factors to determine the constituents and their weightings.

S&P 600 Small Cap Index is an index of small-cap stocks managed by Standard and Poor's. The S&P 600 SmallCap Index covers a broad range of small cap stocks in the United States. The index is weighted according to market capitalization and covers about 3-4% of the total market for equities in the United States.

S&P MidCap 400 Index serves as a barometer for the U.S. mid-cap equities sector and is the most widely followed mid-cap index in existence. To be included in the index, a stock must have a total market capitalization that ranges from roughly $750 million to $3 billion dollars. Stocks in this index represent household names from all major industries including energy, technology, healthcare, financial and manufacturing.



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 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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