The Fed and an ‘Omen’
Weekly Update – June 3, 2013
Markets ended the shortened trading week down, battered by selling pressure and volatility around possible Fed actions. For the week, the S&P 500 lost 1.14%, the Dow slid 1.23%, and the Nasdaq trimmed 0.09%.[i]
Oddly enough, markets rose earlier in the week on a couple of lukewarm economic reports, which raised expectations that the Fed will be forced to continue to bolster the economy with its quantitative easing program. The last weekly jobless report for the month showed an increase in unemployment claims, meaning job growth looks to have been essentially flat over the last two months.[ii] We also got another look at revised first quarter GDP, which came in at 2.4 percent, down from the 2.5 percent initial reading.[iii] The downward revision was expected due to some slower inventory growth.
While poor economic reports typically result in market declines, the short rally is a perfect example of the disconnection that can occur between the economy and equity markets. Currently, investors seem to be more worried about the end of the Fed’s easy money than the economy, so they may react positively to economic data that suggests the Fed will continue its stimulus activities. On the flip side, markets may respond nervously to positive economic data due to the fear that economic improvement will cause the Fed to pull the plug. For this reason, we may see additional volatility and contradictory market behavior in the coming weeks and months as the Fed starts to taper its bond-buying activities.
On the positive side, ‘sell in May’ got trampled, despite some volatility, as markets ended up for the month. Additionally, consumer sentiment for May beat expectations, reaching the highest level since July 2007,[iv] showing that consumers are still optimistic about the economy.
On a side note, you may have seen several headlines referencing the ‘Hindenburg Omen,’ a signal triggered when multiple stocks set new 52-week highs and lows simultaneously, essentially reflecting extreme volatility.[v] When you hear about these types of signals, we urge you to take them with a grain of salt. There is no single technical indicator that can predict with 100% accuracy which direction the stock market will move. While they can be useful at times, we believe technical indicators need to be evaluated in the light of many other factors such as longer-term trends and an investor’s overall objective and tolerance for risk. As always, we will continue working to ensure our clients receive sound investment guidance that is in line with their long-term goals, regardless of what any short-term ‘omens’ may suggest.
ECONOMIC CALENDAR:
Monday: PMI Manufacturing Index, ISM Mfg. Index, Construction Spending
Tuesday: Motor Vehicle Sales, International Trade
Wednesday: ADP Employment Report, Productivity and Costs, Factory Orders, ISM Non-Mfg. Index, EIA Petroleum Status Report, Beige Book
Thursday: Jobless Claims
Friday: Employment Situation
|
Data as of 5/31/2013 |
1-Week |
Since 1/1/2013 |
1-Year |
5-Year |
10-Year |
|
Standard & Poor’s 500 |
-1.14% |
14.34% |
24.45% |
3.29% |
6.92% |
|
DOW |
-1.23% |
15.35% |
21.96% |
3.92% |
7.08% |
|
NASDAQ |
-0.09% |
14.45% |
22.23% |
7.40% |
11.65% |
|
International |
-1.80% |
6.12% |
27.71% |
-4.52% |
5.42% |
|
Data as of 5/31/2013 |
1 mo. |
6 mo. |
1 yr. |
5 yr. |
10 yr. |
|
Treasury Yields (CMT) |
0.03% |
0.07% |
0.14% |
1.05% |
2.16% |
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.
HEADLINES:
U.S. Treasury Department suspends pension fund investments. The Treasury Department announced the suspension of pension fund payments in order to stay under the $16.7 trillion federal debt limit, which has not been raised during sequestration talks. This will affect thousands of federal employees who will have to wait for their pension contributions until the debt limit has been raised.[vi]
Consumer spending falls in April. U.S. consumer spending fell in April for the first time since May 2012, indicating the economy might be experiencing a soft patch. However, the 0.2% drop is not necessarily significant once inflation is factored in; the so-called ‘real’ consumer spending rate has been increasing for six months.[vii]
Pending home sales hit three-year high. Contracts to buy previously owned homes rose in April to the highest level since April 2010, showing that the housing market is still gaining ground. However, a shortage of properties for sale could slow down the momentum.[viii]
Eurozone unemployment on the rise. Eurozone-wide unemployment reached a new record high of 12.2% in April, according to statistics organization Eurostat. Unemployment rates are higher among youths and in periphery nations.[ix]
Securities, advisory services, and insurance products are offered through Investment Centers of America, Inc (ICA), member FINRA, SIPC, a Registered Investment Advisor, and affiliated insurance agencies. ICA and iWealth are separate companies. Investing involves risk including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values.
Diversification does not guarantee profit nor is it guaranteed to protect assets The Standard & Poor’s 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general.
The Dow Jones Industrial Average is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the NASDAQ. The DJIA was invented by Charles Dow back in 1896.
The Nasdaq Composite is an index of the common stocks and similar securities listed on the NASDAQ stock market and is considered a broad indicator of the performance of stocks of technology companies and growth companies.
The MSCI EAFE Index was created by Morgan Stanley Capital International (MSCI) that serves as a benchmark of the performance in major international equity markets as represented by 21 major MSCI indexes from Europe, Australia and Southeast Asia.
The 10-year Treasury Note represents debt owed by the United States Treasury to the public. Since the U.S. Government is seen as a risk-free borrower, investors use the 10-year Treasury Note as a benchmark for the long-term bond market.
Google Finance is the source for any reference to the performance of an index between two specific periods.
Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
Past performance does not guarantee future results.
You cannot invest directly in an index.
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