Weekly Market Notes
September 16, 2013
Dow 15376– S&P 500 1688
The equity markets turned long-standing seasonal patterns upside-down the last two weeks with September returns taking on a January like appearance. Historically January is one of the strongest months of the year for equities and September the weakest. The Dow Industrials soared 3.0% last week matching the big gains the first month of the year. The S&P 500 gained 2.0% and the NASDAQ climbed within a fraction of a new cycle high. The most significant developments in the third quarter have been the improvement in global equity markets.
Economic stability has returned to Europe along with a modest level of GDP growth. Improvement in China’s economy is having a strong influence on the equity markets in emerging economies. This is important because secular bull markets are historically global in scope. The concern had been that the divergence between U.S. markets and foreign markets would eventually cause problems for domestic equity markets. The percentage of world markets now trading above their 52-week moving average improved to 78% last week, a huge improvement over the past six weeks.
The recovery in global markets boosts the long-term prospects for U.S. stocks. This week could prove pivotal for the financial markets with the Syrian situation improving over the weekend and Larry Summers pulling his name from consideration as Fed chairman. Summers was considered to be less enthusiastic about quantitative easing than the other candidates. As a result, S&P 500 futures and gold are sharply higher in pre-market trading on Sunday.
The focus of attention this week centers on the Federal Reserve. As a result the S&P 500 stock futures and gold are sharply higher in pre-market trading Sunday night. The meeting concludes on September 18 and it is widely anticipated that they will reduce the level of quantitative easing by $10 to $15 billion. Bernanke has indicated that business conditions have improved sufficiently to allow for a reduction in the level of stimulus. The latest economic data has been conflicting and likely the reason the Fed will move slowly on reducing quantitative easing.
The Fed Chairman has to be concerned about the housing market where demand has been on the weaker side in recent months with mortgage rates moving higher. But this will not stop Bernanke from acting, as he is also concerned about the unintended consequences of a $4 trillion Fed balance sheet on the financial markets. The bottom line is that the Fed will likely reduce the level of T-Bond purchases by $10 billion while continuing to buy $40 billion a month of mortgage backed securities. This is fully priced into the stock market suggesting investors use only periods of weakness to accumulate equity positions.
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The latest economic data continues to reflect an economy that is not poised for substantial growth. August retail sales were up just 0.1% if auto sales are excluded. Car sales have been strong but it appears that auto sales are taking up a large chunk of discretionary income that is growing at a snail’s pace. This is reflected in the latest consumer sentiment data that show confidence is eroding despite the rise in stock prices this year. Consumer confidence is closely related to how well the stock market is performing and to the strength of the jobs market. The lack of confidence suggests that the labor markets will remain difficult and wage growth will remain weak. The deterioration in sentiment could spoil the outlook for economists who have been expecting a leap in economic activity in the second half of the year.
Inflation remains a nonissue as seen in the latest Producer Price Index (PPI) for August. Wholesale prices rose 0.3% but most of that was due to rising energy prices. Core PPI was unchanged; consensus was for a 0.1% rise. Import prices were flat in August, excluding energy, falling 0.2%. On a year-over-year basis import prices are down 0.4%, suggesting inflation will not be a problem any time soon. This has favorable implications for bond prices along with the fact that pessimism in the fixed income area is excessive.
This opens the possibility that yields could fall over the near-term once the Fed articulates monetary policy going forward. The economic news this week is expected to be mixed with August industrial production to be reported on Monday expected to be up slightly from July. Consumer prices for August to be reported on Tuesday are anticipated to have risen 0.2% for the month. Data concerning housing could provide some anxiousness for the markets this week. August housing starts are expected to be higher over July. Mortgage applications and existing home sales in August are anticipated to be down slightly month-over- month.
Sector Rankings and Recommendations
No. 1 Consumer Discretionary = Strongest sector – Hold. Groups expected to outperform: Auto Parts & Equipment, Broadcast & Cable TV, Casinos & Gaming, and Consumer Electronics
No. 2 Health Care = Continued strong RS – Buy. Groups expected to outperform: Health Care Distributors, Managed Health Care, and Biotechnology
No. 3 Industrials = Strong RS - Buy. Groups expected to outperform: Employment Services, Office Services & Supplies, Air Freight & Logistics, Construction & Farm Machinery, Electrical Components & Equipment and Aerospace & Defense
No. 4 Materials = Gaining in RS – Buy. Groups expected to outperform: Paper Packaging, Steel, Industrial Gases, Diversified Metals & Mining, and Diversified Chemicals
No. 5 Financials = Weakening RS trends – Hold. Groups expected to outperform: Investment Banking & Brokerage, Multi-line Insurance, and Insurance Brokers
No. 6 Information Technology = Improving RS – Buy. Groups expected to outperform: Application Software, Office Electronics, Computer Storage & Peripherals, Computer Hardware and Electronic Manufacturing Services
No. 7 Energy = Poor RS – Hold. Groups expected to outperform: Oil & Gas Equipment & Services and Oil & Gas Exploration & Production
No. 8 Consumer Staples = Losing RS – Hold. Groups expected to outperform: Food Retail, Agricultural Products, Distillers & Vintners and Drug Retail
No. 9 Telecom = Small improvement in RS – Hold. Groups expected to outperform: Wireless Telecom Services
No.10 Utilities = Decline in RS – Hold. Groups expected to outperform: Gas Utilities and Independent Power Producers
Got Questions? Ask Guido
Article provided by Robert W. Baird & Co. with the authorization of its author for Evan Guido, Vice President, Financial Advisor at the Sarasota office of Robert W. Baird & Co., member SIPC. The opinions expressed are subject to change, are not a complete analysis of every material fact and the information is not guaranteed to be accurate.
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Evan R. Guido
Vice President of Private Wealth Management
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