Week in Review: 1/30/12 – 2/3/12
The major market indices finished the week mixed to modestly higher. The S&P 500 has now gained in five of the past six weeks.
Performance for Week Ending 2/3/12:
The Dow Jones Industrial Average (Dow) gained 1.59%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) rose 2.38%, the Standard & Poor’s 500 Index (S&P 500) added 2.17% and the Nasdaq Composite Index (Nasdaq) tacked on 3.16%. Sector breadth was positive as all 10 of the S&P sector groups finished higher. The Financials sector (+4.23%) was the best performer while the Utility sector (+0.23%) was the laggard. The Canadian market, as measured by the S&P/TSX Composite Index, gained 0.89%.
| Index* | Closing Price 2/3/12 | Percentage Change for Week Ending 2/3/12 | Year-to-Date Percentage Change Through 2/3/12 |
| Dow | 12862.23 | +1.59% | +5.28% |
| Wilshire 5000 | 13996.23 | +2.38% | +7.71% |
| S&P 500 | 1344.90 | +2.17% | +6.94% |
| Nasdaq | 2905.66 | +3.16% | +11.54% |
| S&P/TSX Composite | 12577.28 | +0.89% | +5.20% |
*See Last Page for Index Definitions MARKET OBSERVATIONS: 1/30/12- 2/3/12
The major market indices finished the week solidly higher reflecting the better than expected monthly employment report and signs of stabilization in the global economy. The solid gains were posted despite the lack of an agreement being reached in the Greek debt swap negotiations, although one is anticipated to be reached in the near future. The positive performance may be hinting that the U.S. markets may have decoupled themselves from the euro zone problems. While I don’t fully believe that to be the case, I do believe that fears surrounding Europe have lessened after the European Central Bank introduced its long-term refinancing operation (LTRO). What began as a sovereign debt crisis in Europe had started to morph into a banking crisis. The introduction of the LTRO—which offered banks a source of unlimited cheap funds—appears to have taken those fears off the table.
The market’s resiliency—in the face of the 22%-plus advance from the early-October lows, growing levels of complacency, and the seasonal shift to the less friendly month of February—is very impressive and suggests that in the near-term investors may feel the bigger risk is to be out of the markets versus in them. While markets can stay in “overbought” territory for extended periods, the fact that earnings season is beginning to wind down and the employment data is already in the bag, investors may start to question how much of the recent good news has already been discounted in the markets.
Markets have been firing on all cylinders and the level of fear, as measured by the 6-month low in the CBOE Volatility Index (VIX), suggests high levels of complacency (a contrarian indicator). This scenario raises concern that any type of news flow or economic data that goes against the “bullish grain” could trigger a near-term sell-off. With that said, periods of consolidation should be viewed as ‘healthy’ in the sense that they help keep expectations in check and weed out excesses that tend to get built into stock prices.
In the near-term emotions and headlines tend to drive stock prices; however, over the intermediate to long-term it’s fundamentals (earnings, interest rates, valuation, etc.) that count. As we transition to the next phase of the market cycle, where fundamentals will once again matter, the macro drivers of stock prices remain healthy and ultimately should become the driving force to further gains over the course of this year.
In addition, while the market may be in need of a breather (a “pause to refresh”) it’s hard not to be upbeat on risk assets with almost every major central bank around the globe in some sort of easing effort to backstop their respective markets/economies. This scenario suggests that any pullback in the market may be short and shallow and should be viewed as a buying opportunity, especially for investors with a longer-term time horizon.
Economic Roundup
On Friday the Labor Department reported that nonfarm payrolls rose by 243K in January, well ahead of the 140K expected by economists. The unemployment rate dipped to 8.3% (from 8.5%) and private payrolls—which filter out government hiring/firing—rose by a better than expected 257K. Although January data can be fuzzy because of seasonal influences and historical revision, there’s no denying that the labor market conditions continue to heal. Over the past 12-months the economy has added 1.95 million jobs and the three-month average has risen to 201K per month, the highest rate of growth since April.
The Payroll report was followed by a better than expected report from the Institute for Supply Management (ISM) that showed the non-manufacturing (services) sector expanding to the highest level since last February. The ISM report is watched closely as service oriented businesses account for the bulk of economic activity in the U.S. In addition, unlike the manufacturing side of the economy, service related businesses tend to be more levered to the domestic economy. In addition to the better than expected headline number, the new orders and employment components also posted solid gains, with the latter posting the best gain since February 2006.
While the domestic economy remains on firm footing, there were signs this week that global economic conditions may be starting to stabilize. At the start of each month manufacturing data for almost every major economy around the world is reported. Overall, the reports showed manufacturing momentum picking up around the globe and in particular, China’s manufacturing sector expanded at a greater than expected pace. In addition, the pace of contraction in the euro zone was not as steep as forecast. In the U.S., the ISM manufacturing index expanded for a 30th consecutive month. While all is still far from perfect, the data suggests things continue to get less bad.
Technical Turn Golden
The technical outlook for the market has also turned more favorable. This week the S&P 500 gave a “golden cross” signal—a situation where the 50 day moving average (DMA) crosses above the 200 DMA. This event is considered technically significant and is often viewed as a confirmation that the broader market trend has turned bullish. According to Strategas Research, since 1928 there have been 43 “golden cross” signals and on average, the market gained almost 10% one year after the signal was given. While past performance is no guarantee of future success, the “golden cross” should be viewed as another piece of the bullish puzzle coming together.
Q4 Earnings
Through Friday, 291 members of the S&P 500 have reported quarterly results, with overall earnings up 3.6%. When the volatile Financials sector is excluded earnings are up a more respectable 8.0%. Of the companies that have reported, 59.8% have beaten analyst expectations while 29.6% have fallen short. The current “beat” rate is falling slightly short of the historical 61% average and is well 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 4.9% (+6.5% ex-financials), a sharp slowdown from recent quarters.
While overall earnings have been generally lackluster, there have been many bright spots including the blowout results from Apple Computer (an excellent proxy for consumer spending). In addition, 3M Company and United Parcel Services (UPS), both of which are considered economic bellwether due to their broad geographical reach and diverse product lines and customer bases, reported solid results and upbeat forward outlooks.
Looking Ahead
After a busy few weeks both the earnings and economic calendars take a breather. On the earnings front only 69 members of the S&P 500 are scheduled to report results. The economic calendar contains little in the way of market moving data with only Thursday’s initial jobless claims report and Friday’s U of Michigan Confidence report expected to garner interest. Fed heads will be out and about this week with six speeches on the docket including Fed Chairman Bernanke’s testimony to the Senate Budget Committee on Tuesday.
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 through late-2014. 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.
Institute for Supply Management (ISM) Indices:
The 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.
The 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.
Strategas Research Partners, LLC is a leading investment strategy, macro-economic, and policy research firm focused on providing timely and insightful research on the global equity and debt markets to the institutional investment community.
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.