Week of May 2, 2016
A trio of concerns conspired against markets and mired the momentum gathered over the past few weeks. Lackluster earnings, weak domestic economic data and a surprise by the Bank of Japan clipped equities in the back half of the week.
Both the Dow Jones Industrial Average and the S&P 500 fell 1.3%. Disappointing earnings among technology stocks sank the Nasdaq even more, 2.7%.
Déjà Vu All Over Again
Last Thursday, the Commerce Department reported that gross domestic product grew a seasonally adjusted 0.5% for the first quarter of 2016. This is the slowest advance in two years and continues a pattern of starting the year off slowly. Over the past five years, first quarter GDP has averaged below 1% while each period for the remainder of the year has posted 2-3% gains. The villain responsible for the lackluster report was a sharp drop in business investment. Fixed non-residential investment fell nearly 6%, the steepest decline since early 2009. Consumers tightened their purse strings too. Consumer spending rose just 1.9%, a modest deceleration from late 2015. The lone bright spot in the report remains in housing. Fixed residential investment expanded nearly 15%, the strongest growth since late 2012. Looking forward, the second quarter seems ripe for some growth acceleration, but only modestly to around a 2% annualized pace, making the Fed’s decision on rate hikes even more difficult.
Central Banks Sit On Their Hands
The Federal Reserve left interest rates unchanged in a statement following its two-day meeting last week. This was widely expected. Fed watchers parsed the text to figure out what the next step might be, and specifically if the central bank is poised to take action at its next meeting in June. The statement gave few clues. Chairwoman Jane Yellen stated the central bank remains data dependent but commented that the economy is performing well in some areas but continues to struggle in others. Fed futures now predict a 15% chance of a rate hike in June. The lack of action by the Federal Reserve was expected, but the Bank of Japan stunned the market later in the week when it failed to enact further stimulus. It was widely expected that the BOJ would take further actions to stimulate the Japanese economy and stem the recent rise of its currency. This move has left many investors wondering if the Japanese central bank has run out of policy tools.
Early last week market watchers got a glimpse of a golden cross in the S&P 500, Wall Street’s equivalent to the snow leopard, the well-known but rarely witnessed Himalayan big cat. A golden cross occurs when the 50-day moving average moves above the 200-day moving average when markets are rising. This has only happened 16 times, and it is usually interpreted as an extremely bullish indicator by technicians. However, Bespoke Investment Group analyzed golden crosses over the last five decades and discovered the market was up about half the time over the subsequent one-month, three-month and six-month periods, making it about as good as a coin flip when predicting future performance. This one occurs at a particularly interesting time too, right as we enter one of the market’s historically weakest seasonal periods between May and October.
Fun Story of the Week
Last week, Facebook and Instagram feeds were filled with little ones invading cubicles and conference rooms for “Take Your Daughters and Sons to Work Day.” The public education program is intended to help kids connect what they learn in school with what occurs in the working world, and in most places it goes off without a hitch. Things didn’t go as well for a National Public Radio office in Los Angeles. At 11:04a.m., several NPR stations on the west coast experienced more than a minute of dead air after one of the visiting “junior journalists” started playing with the knobs and buttons on the sound board and killed the feed. The NPR engineer in charge later joked about hiring the kid because the exact sequence of buttons to push and the precise timing needed are difficult for some seasoned sound engineers to remember. NPR learned the hard way the one unwritten rule of “Take Your Kid to Work Day”: don’t leave the kids in a room full of buttons.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
This newsletter was written and prepared by CWM, LLC. Content in this material is for general information only and not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and may not be invested into directly.
The Dow Jones Industrial Average is comprised of 30 stocks that are major factors in their industries and widely held by individuals and institutional investors.
The NASDAQ Composite Index measures all NASDAQ domestic and non-U.S. based common stocks listed on The NASDAQ Stock Market. The market value, the last sale price multiplied by total shares outstanding, is calculated throughout the trading day, and is related to the total value of the Index.
S&P 500 INDEX
The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Financial Times, April 2016, https://www.ft.com/intl/cms/s/2/239c27ec-06e8-11e6-a70d-4e39ac32c284.html#axzz46YrGGIHw
Financial Times, April 2016, https://www.ft.com/intl/cms/s/0/b95860f2-05d5-11e6-a70d-4e39ac32c284.html#axzz46JAwLCaE
Wall Street Journal, April 2016, http://www.wsj.com/articles/dollar-drilled-by-tepid-housing-data-1461076845
Wall Street Journal, April 2016, http://www.wsj.com/articles/japanese-yen-flirts-with-18-month-high-1460960937
US Energy Information Agency, April 2016, https://www.eia.gov/forecasts/steo/report/global_oil.cfm
Investing.com, April 2016, http://www.investing.com/quotes/us-dollar-index-historical-data
CNBC, April 2016, http://www.cnbc.com/2016/04/17/oil-price-falls-after-doha-summit-of-opec-other-producers-ends-without-output-freeze-deal.html
CNBC, April 2016, http://www.cnbc.com/2016/04/18/low-oil-prices-dont-cut-into-us-production-by-much.html
CNBC, April 2016, http://www.cnbc.com/2016/04/18/us-markets.html