Week in Review: 1/16/12 – 1/20/12
The major market indices finished higher for a third consecutive week.
Performance for Week Ending 1/20/12:
(Wilshire 5000
SM) rose 2.10%, the Standard & Poor’s 500 Index (S&P 500) added 2.04% and the Nasdaq Composite Index (Nasdaq) tacked on 2.80%. Sector breadth was positive as nine of the 10 S&P sector groups finished higher. The Technology sector (+3.24%) was the best performer while the Utility sector (-0.60%) was the laggard. The Canadian market, as measured by the S&P/TSX Composite Index, gained 1.36%.
| Index* | Closing Price 1/20/2012 | Percentage Change for Week Ending 1/20/2012 | Year-to-Date Percentage Change Through 1/20/2012 |
| Dow | 12720.48 | +2.40% | +4.12% |
| Wilshire 5000 | 13622.41 | +2.10% | +4.84% |
| S&P 500 | 1315.38 | +2.04% | +4.59% |
| Nasdaq | 2786.70 | +2.80% | +6.97% |
| S&P/TSX Composite | 12397.10 | +1.36% | +3.70% |
*See Bottom of the Page for Index Definitions
MARKET OBSERVATIONS: 1/16/12- 1/20/12
The major market indices finished higher for a third straight week. Gains were driven by additional evidence of economic progress in the U.S. and easing concerns over the funding environment in Europe.
Signs continue to emerge that global risks are beginning to ease somewhat and may have been over discounted in stock prices. Of particular note, last week both France and Spain held very successful debt auctions. The strong demand for both countries’ debt suggests that financial tensions in the euro zone may be lessening. This was also evident in the interbank lending markets where LIBOR rates have also started to ease.
Investors’ shrugged off the recent ratings downgrade of several euro zone economies by rating agency Standard & Poor’s. While the initial reaction by many commentators indicated this would act as a major headwind, I on the other hand, believe that the reaction to the news is much more telling than the actual news. On this front, the fact that all of the major European bourses finished sharply higher last week and yields actually tightened, suggests that the downgrades were widely expected and the news was already adequately discounted in the markets.
The downgrades may ultimately be seen as a positive catalyst. First they weren’t as bad as many had assumed. Expectations were building that France was going to be downgraded by two notches versus the actual one notch downgrade the country received. Secondly, the action removes a cloud of uncertainty that has been overhanging the markets. Lastly, the lowered ratings will likely create a sense of urgency amongst European policymakers to find some middle ground in their search for a resolution to the debt crisis. In the U.S., economic data continued to provide further evidence that the economy remains on firm footing. Positive data last week included a report from the Labor Department showing that initial jobless claims fell to the lowest level since April 2008. In addition, the New York Federal Reserve reported that manufacturing activity in the greater NY region rose at the fastest pace in 9 months. The gain marked the third consecutive month of expansion.
In another sign that global growth expectations are beginning to improve, copper prices rose to their highest level since last September and have gained almost 9% since the start of the year. Copper is jokingly said to have a PhD in economics as it has often been a pretty good indicator of broader-based trends in the global economy. Copper is one of the most widely used industrial metals with exposure to sectors as diverse as automobiles, housing and electronics. The move in copper also coincides with the favorable sector leadership that has been in place since the beginning of the year. Investors have generally shied away from the more “defensive” sectors (Utilities, Consumer Staples) and instead opted to pile into sectors that are more levered to underlying economic growth (Materials, Financials, Industrials and Technology).
Lack of Fear is a Little Scary
The markets have kicked off the New Year in a very impressive fashion, however, it is somewhat concerning how complacent investors have become. The CBOE Volatility Index (VIX), which tends to be a good barometer of fear in the market, has fallen to the lowest level in almost six months. Sentiment tends to be a contrarian indicator and the lack of fear, in light of the still elevated uncertainty around the globe, is somewhat worrisome. While the ‘gloom and doom’ headlines have mostly fallen off the front pages, the threat and negative consequences of a policy related mistake, particularly in Europe, still very much exists.
While the outlook for the market remains favorable, the high levels of complacency and near-term overbought conditions could result in a period of near term consolidation. However, based on the favorable fundamentals, a corrective phase would be viewed as a constructive event and would likely set the stage for the next leg up in the market, in my opinion.
Mixed Start to Q4 Earnings Season
Fourth quarter earnings season is off to a mixed start although it still remains too early to draw any firm conclusions for the overall quarter. Through Friday, 77 members of the S&P 500 have reported quarterly results, with overall earnings off 7.4%. When the Financials are excluded earnings are up a meager 2.4%. Of the companies that have reported, 61% have beaten analysts’ expectations while 28% have fallen short. The current “beat” rate is in line with the historical 61% average but below the pace achieved in recent quarters. When all is said and done, fourth quarter earnings for the S&P 500, according to Bloomberg data, are expected to rise 3.4%, a sharp slowdown from recent quarters and a fraction of the 14.1% they were estimating at the start of October.
Looking Ahead
The focal point of the upcoming week will be the two-day Federal Open Market Committee (FOMC) meeting. While no new policy initiatives are expected at Wednesday’s conclusion, investors are expected to pay very close attention to the after- meeting communiqué due to the recently announced inclusion of the Federal Reserve’s (the “Fed”) interest rate projections. The meeting will be followed by a 2:15 p.m. ET press conference from Fed Chairman Bernanke who will likely give further insight into the Fed’s thinking on the economy and future monetary policy. Fourth quarter earnings season enters its second week of “peak” earnings with 119 members of the S&P 500 scheduled to report results. The economic calendar will include readings on housing, durable goods orders, jobless claims, leading indicators and the initial reading of Q4 GDP.
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.
The Chicago Board Options Exchange Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices.
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.