Performance for Week Ending 9/8/2017:
The Dow Jones Industrial Average (Dow) fell 0.68%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) finished off 0.70%, the Standard & Poor’s 500 Index (S&P 500) lost 0.41% and the Nasdaq Composite Index (NASDAQ) shed 1.07%. Sector performance was mixed as six sector groups declined and five advanced. The Energy sector (+2.13%) was the best performer while Telecomm (-4.46%) was the worst.
||Closing Price 9/8/2017
||Percentage Change for Week Ending 9/8/2017
||Year-to-Date Percentage Change Through 9/8/2017
*See below for Index Definitions
MARKET OBSERVATIONS: 9/4/2017 – 9/8/2017
The major market indices finished the week moderately lower as investors remain on edge due to the lingering geopolitical tensions with North Korea, the uncertainty surrounding the economic impact from Hurricane Harvey and Hurricane Irma, and the messy political situation in Washington D.C.
Stormy Weather: Hurricane Harvey and Hurricane Irma are likely to distort economic data in the coming months although the broader narrative surrounding the economic recovery is not likely to change. The economic impact from devastating storms tends to be temporary as the rebuilding efforts that follow have historically sparked an uptick in economic activity and therefore, tends to wash out the initial negative impact. In general, the growth trend that was in place prior to the event, often reestablishes itself within one to two quarters.
Data distortions are already showing up in the higher frequency economic reports. On Thursday, the Labor Department reported that initial jobless claims during the week ended September 2 rose 62k to 298K, well above the 245K expected by economists. The Labor Department cited Hurricane Harvey as the primary reason for the sharp jump in claims. The four week moving average—which helps smooth the week-to-week volatility—rose to 250.3K but still remain near multi-decade lows.
US Politics: Last week President Trump cut a deal with Democrats leadership to provide disaster relief funds, as well as, to extend the debt ceiling and fund the government for three additional months. While the move certainly helps avert a near-term debt crisis and a government shutdown, it also sets the stage for a brutal year-end fiscal fight. While initial reaction to the news was applauded by the market, the three-month compromise isn’t necessarily positive as it keeps the Congressional agenda clogged and could distract Republicans from pursuing things like tax reform.
Fed Leadership: The future leadership of the Federal Reserve was also a flash point last week. Janet Yellen’s term as Fed Chairperson is due to expire in early February. While it remains unclear at this juncture who will take the reins, one leading candidates now seems to be out of the running. According to an article in the Wall Street Journal, President Trump is "unlikely to nominate" National Economic Council Director Gary Cohn to become the new Fed chair as a result of critical comments he made against Trump in reaction to the President’s post-Charlottesville commentary. While most investors would be relieved to see Yellen reappointed, the White House on Friday said there are currently six (unnamed) candidates being considered for the job.
In a surprise move, Fed Vice chairman Chair Stanley Fischer announced his retirement in a letter to President Trump. Fischer, citing personal reasons, will resign from his post by mid-October. While the timing of Fischer’s resignation was surprising, many Fed watchers have been expecting him to step down prior to the end of his term. With Fischer’s departure there will now be four of the seven seats on the Fed Board vacant.
Rates Hike Odds Declining: In a media interview on Friday, NY Fed President Bill Dudley said the back-to-back hurricanes “could have an effect on the timing of short-term rate increases.” The statement was somewhat at odds with a speech Thursday night where Dudley said he still supports another interest-rate hike this year. That view pitted him against some of his colleagues, who have become more cautious in recent weeks because of a string of low inflation readings. Earlier in the week, Fed Governor Lael Brainard said that "it would be prudent to raise the federal funds rate more gradually" until higher inflation trends return. Brainard added that the central bank will have "substantially more data in hand in coming months" with which to evaluate inflation. Rate hike probabilities have been declining in recent weeks with the Bloomberg World Interest Rate Probability function showing only a 22% chance of a rate hike at the December FOMC meeting. In fact you have to go all the way out to September 2018 before the probability rises above 50%.
Market View – Stay the Course: We believe the bull market remains intact. However elevated valuation levels, political uncertainty and unfavorable seasonals during the late-Summer/early-Fall months certainly raise the odds of a near term pullback. The “Goldilocks” environment (not too hot, not too cold as far as economic growth and inflation are concerned) should help limit the downside risk. From a macro point of view, the world is enjoying a period of synchronized global growth, which has resulted in a favorable turn in the earnings environment. In addition, valuation levels—while elevated—are far from extreme. If the market were to stage a pullback in the coming months, it would be viewed as healthy and corrective in nature and not the start of a broader leg lower - in other words, a good buying opportunity, especially for longer-term investors.
The Week Ahead: The most anticipated event of the upcoming week will be the new product launch from Apple on Tuesday. The company is expected to introduce new iPhone models and an updated version of the Apple watch. Apple is very widely held and a large component of most of the major indices. An underwhelming presentation or disappointment in the new products could result in uptick in trading volatility. Inflation will be the focal point of the data calendar with the August Producer Price Index (PPI) due out Wednesday and the August Consumer Price Index (CPI) released on Thursday. Other reports of interest include, the July Job Openings and Labor Turnover Survey (JOLTS) report, August retail sales, the September Empire State Manufacturing Survey, August industrial production and capacity utilization, July business inventories and the University of Michigan’s preliminary September consumer sentiment survey. The Fed speaking calendar will be quiet reflecting the traditional black out period ahead of the upcoming (September 19-20) Federal Open Market Committee meeting. The earnings calendar is almost nonexistent with only one member of the S&P 500 scheduled to report results.
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.
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*Assets under management is as of 09.30.2018 and includes leverage of $11.8bn.
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