Week Ends with Another Cliffhanger

The Dow Jones Industrial Average (Dow) rose 0.99%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.13%, the Standard & Poor's 500® Index (S&P 500) added 0.13% and the NASDAQ Composite Index (NASDAQ) shed 1.07%. Sector breadth was mixed as ...

December 10, 2012    |    By Mike Schwager

Performance for Week Ending 12/7/12:

The Dow Jones Industrial Average (Dow) rose 0.99%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) gained 0.13%, the Standard & Poor's 500® Index (S&P 500) added 0.13% and the NASDAQ Composite Index (NASDAQ) shed 1.07%. Sector breadth was mixed as 6 S&P sector groups finished higher while 4 finished lower. The Financials sector (+1.69%) was the best performer while Materials (-1.92%) was the worst.

Index* Closing Price 12/7/12 Percentage Change for Week Ending 12/7/12 Year-to-Date Percentage Change Through 12/7/12





Wilshire 5000




S&P 500








*See Last Page for Index Definitions    

MARKET OBSERVATIONS: 12/3/12 - 12/7/12

The major market indices finished the week mixed as the lack of progress in the fiscal cliff negotiations kept many investors tethered to the sidelines. While concern over the Eurozone continues to ease and U.S. economic data suggested moderate growth, the focus remained on the fiscal cliff with everything else generally being viewed as background noise.

While the inability to reach a resolution in the fiscal cliff negotiations would likely result in a kneejerk sell-off in the markets, the weakness could also set the stage for a buying opportunity for longer-term investors. As mentioned in these missives numerous times, a resolution of the fiscal cliff is the most desired outcome (and still likely, in my opinion), however I also continue to believe that even a bad outcome may at least be partially offset by the removal of uncertainty. The one thing both businesses and investors despise is not knowing the rules of the game. Therefore, if businesses and investors ultimately know where tax rates, etc. are going they can better plan for the change and position their businesses/portfolios to operate more effectively within the new framework.  With anecdotal evidence of pent-up demand, businesses would likely begin to boost capex spending, which in turn could be a catalyst for a pickup in hiring.

Despite the near term uncertainty in the markets, I continue to believe the path of least resistance over the next several quarters will be higher. The combination of attractive valuation, favorable FED policy, the eventual clarity on the fiscal front and expectations of steady but modest economic growth should remain supportive for risk assets. Couple the aforementioned factors with the easing euro-area crisis, the likelihood that growth in China has started to trough and the lessening tensions in the Middle East, then periods of consolidation, in my opinion, should be viewed as an opportunity for long-term investors to scale back into the markets.

Payroll Report
Last week the Labor Department reported that nonfarm payrolls rose by a better than expected 146,000 while the unemployment rate dipped to 7.7%, the lowest since December 2008. Private payrolls—which filter out government hiring/firing—gained 147,000 – well ahead of the 90,000 gain expected by economists. According to the Labor Department, Hurricane Sandy had little impact on the U.S. labor market during the month.

On the surface, the Payroll report was favorable; however, a deeper dive into the data suggested the report was more of a mixed bag. While the headline non-farm payroll number far exceeded economists' expectations, the downward revision to both the September and October data (which subtracted 49K jobs) took a bit of shine off the November number. In addition, the dip in the unemployment rate appeared to be more of a function of decline in the labor force as opposed to strong hiring metrics. Bottom line, the report suggests the labor market remains in stabilization mode with subpar growth and therefore should have little impact on the FED's accommodative policy stance at the upcoming Federal Open Market Committee (FOMC) meeting.

FOMC Meeting On Tap
The FOMC will gather this week for their final meeting of 2012. As mentioned last week, the FED has been “telegraphing” that they are likely to continue with their aggressive monetary efforts in 2013. At the conclusion of the two-day meeting the committee is likely to signal that the current bond purchase rate of $85 billion per month will be sustained for the foreseeable future. Since September the FED has been buying $40 billion a month of mortgage-backed securities as well as $45 billion per month of U.S. Treasury securities.  The latter program, known as Operation Twist, is scheduled to end in December, but is likely to be extended as suggested by a recent article in the Wall Street Journal from noted FED-watcher Jon Hilsenrath.  Extending their commitment at this week’s meeting seems logical as FED Chairman Bernanke is scheduled to host a press conference at the conclusion of the meeting. This would give Bernanke a forum to explain why the committee feels it is necessary to keep the pace of quantitative easing at the current rate. Bernanke is likely to make the case that high levels of liquidity have been supportive of risk assets and the housing market. In addition, he is likely to state that the current rate of economic growth remains below the FED’s desired pace.

The Week Ahead:
The focal points of the upcoming week will be the two-day FOMC meeting on Tuesday and Wednesday as well as the ongoing fiscal cliff negotiations. The economic calendar contains several reports of interest including reports on both consumer and producer inflation, retail sales, jobless claims, industrial production and small business optimism.


While uncertainty surrounding the resolution of the fiscal cliff will likely weigh on near term stock performance, expectations of an eventual solution should set the stage for higher asset prices as we approach the end of the year. Domestic growth has been gaining traction reflecting the resiliency of the consumer and the improving housing sector.  While the political “noise” will dominate the investment landscape in the near-term, equities remain attractive on a longer term basis reflecting the combination of attractive valuation, the overall healthy nature of corporate balance sheets and the commitment from the FED to maintain accommodative monetary policy through at least mid-2015.

Potential Risks/Wildcards: Expectations that equity prices will trend higher over time assumes that a resolution to the debt problems in Europe will be found, that monetary policy will remain accommodative, and that no major fiscal policy mistakes are made. An adverse outcome to any of the above factors would likely lead to a reevaluation of the bullish outlook.


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.

The S&P/TSX Composite Index is a capitalization-weighted index designed to measure market activity of stocks listed on the Toronto Stock Exchange (TSX). The index was developed with a base level of 1000 as of 1975.


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