Week in Review: 1/2/12 – 1/6/12
The major market indices finished the week solidly higher as growing signs the U.S. economy is on firmer footing outweighed renewed concerns over the European debt crisis.
Performance for Week Ending 1/6/12:
The Dow Jones Industrial Average (Dow) gained 1.17%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 1.62%, the Standard & Poor’s 500 Index (S&P 500) added 1.61% and the Nasdaq Composite Index (Nasdaq) tacked on 2.65%. Sector breadth was positive as seven of the 10 S&P sector groups finished higher. The Materials sector (+3.82%) was the best performer while the Telecom sector (-2.73%) was the worst. The Canadian market, as measured by the S&P/TSX Composite Index, gained 1.95%.
| Index* | Closing Price 1/6/2012 | Percentage Change for Week Ending 1/6/2012 | Year-to-Date Percentage Change Through 1/6/2012 |
| Dow | 12359.92 | +1.17% | +1.17% |
| Wilshire 5000 | 13204.42 | +1.62% | +1.62% |
| S&P 500 | 1277.81 | +1.61% | +1.61% |
| Nasdaq | 2674.22 | +2.65% | +2.65% |
| S&P/TSX Composite | 12188.64 | +1.95% | +1.95% |
*See Bottom of the Page for Index Definitions
MARKET OBSERVATIONS: 1/2/12- 1/6/12
The markets kicked off the New Year on a positive note with all the major market indices posting solid gains. The favorable showing came in the face of renewed concerns over the European debt crisis and the growing likelihood that the European economy is poised to enter into a recession.
As we turn the page on the calendar, the one certainty that we can likely count on is that volatility and uncertainty will be ever present. In times of uncertainty investors have a tendency to gravitate towards what are perceived to be safe haven environments. This, in my opinion, will continue to make the United States the destination of choice. Not only does the U.S. market offer an expanding economy and an accommodative Federal Reserve, but market valuation is very attractive and corporate balance sheets are in very healthy shape.
Payroll Data
On Friday, the Labor Department reported that nonfarm payrolls in December rose by a much better than expected 200K while the unemployment rate dropped to 8.5%. After topping out at 10% in October 2009, the unemployment rate now stands at its lowest level in almost three years. Private payrolls—which filter out government hiring/firing—rose by 212K. For all of 2011, the economy added 1.64 million jobs. The recent turn in employment statistics suggests that the acceleration in economic data over the past few months is beginning to filter through into the labor markets.
FOMC Enhances Communication Policy
Last week, the Federal Reserve released the meeting minutes from the December 13 Federal Open Market Committee (FOMC) meeting. As expected, the minutes laid out the Fed’s plan to enhance its communication policy starting at the next gathering (January 24/25). The shift in communications strategy is designed to provide better clarity on the Fed’s thinking in terms of the future of interest rates moves. In a sense, the enhanced communication policy is being used as another tool to manage market expectations and in turn, the direction of interest rates.
Economic Data
In addition, to the better than expected payroll data, there were several other reports that underscored that the U.S. economy is on firmer footing. Of particular note, the Institute for Supply Management (ISM) reported that both the manufacturing and non-manufacturing (services) sectors of the economy expanded during the month of December. In addition, the new orders component (considered a leading indicator of the manufacturing report) rose to its highest level since last April, suggesting solid momentum heading into the New Year. For the past few months, the bulk of economic data has come in solidly above economists’ expectations. In fact, the Citigroup Economic Surprise Index currently stands at the highest level since last March.
Earnings Season on Deck
Fourth quarter earnings season will unofficially kick-off on Monday when Dow-component Alcoa reports after the close. Expectations heading into the quarter have been pared back significantly with analysts expecting the S&P 500 to show 6% year over year earnings growth, a significant reduction from the 14.1% forecasted rate at the end the third quarter. Over the past several quarters, analysts have generally been too conservative in their earnings forecasts and based on the solid underlying economic data over the course of the past few months, that may once again prove to be the case—stay tuned.
While earnings results will be watched very closely, investors will likely pay added attention to forward-looking statements. Of interest will be how corporate managers expect rising energy costs, the strength in the dollar, and the economic weakness in Europe to impact their businesses.
Seasonals/January Effect/Technicals
Market performance in early January is watched very closely. According to the Stock Trader’s Almanac, when the first five trading days of January are positive, the markets have finished the full year higher almost 87% of the time (since 1950). Also boding well for the market this year is the presidential election cycle. Post World War II election years have produced a median return of 9% for the S&P 500 with gains 80% of the time. Technical considerations may have also be at work last week as the S&P 500 moved solidly above its 200-day moving average, a potential signal that the market’s broader trend may be turning positive.
Looking Ahead
As mentioned, Dow-component Alcoa is scheduled to report fourth quarter results on Monday. In total, only six members of the S&P are scheduled to report this week, however, 171 members will release results in the subsequent two weeks. The economic calendar will be relatively light this week with the focus on Thursday’s retail sales and initial jobless claims reports. Fed heads will be out in full force with over a dozen presentations on the docket.
MARKET VIEWPOINT
I continue to believe that the U.S. equity markets remain well positioned for positive performance over the course of 2012. This upbeat viewpoint reflects the markets attractive valuation, the overall healthy nature of corporate balance sheets, expectations that corporate profits will remain strong, and the pledge from the Federal Reserve that monetary policy will remain accommodative for at least the next two years. In light of the favorable macro environment, I continue to believe that market weakness represents an attractive entry point, especially for longer-term investors.
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.
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.
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.
Institute for Supply Management (ISM)
Manufacturing Index is a monthly composite index that is based on surveys of 300 purchasing managers throughout the United States in 20 industries in the manufacturing area. The index is released on the first business day of the month and covers the previous month’s data, which makes it particularly timely. If the index is above 50, it indicates that the economy is expanding. Values below 50 indicate a contraction.
Non-Manufacturing Index (or Services Index) is based on surveys of 370 purchasing and supply executives. If the index is over 50, it typically indicates expansion among non-manufacturing components of the economy. A value under 50 indicates contraction. There are ten sub-indices. Of those, the business activity sub-index is most influential. The other nine indices are new orders, supplier deliveries, employment, inventories, prices, backlog of orders, new export orders, imports, and inventory sentiment. A limitation of the survey is that it doesn’t include any questions on wages, which is an important component of overall costs.
The Citigroup Economic Surprise Indices are objective and quantitative measures of economic news and attempt to show whether economic data is beating or missing expectations. A positive reading suggests that economic releases have on balance been beating consensus. The indices are calculated daily in a rolling three-month window.
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.