What I’m Watching This Week – 3 November 2014

The Markets

A robust U.S. GDP reading coupled with the prospect of greater economic stimulus in Japan and additional positive corporate earnings reports helped drive both the Dow industrials and the S&P 500 to new record highs. The small caps of the Russell 2000 saw their third straight week of solid gains, which gave the index a positive year-to-date return once again.

Gold tumbled nearly $60 an ounce, hurt in part by the promise of additional monetary stimulus by the Bank of Japan. And the benchmark 10-year Treasury retreated as investors regained an appetite for equities risk.

Market/Index 2013 Close Prior Week As of 10/31 Weekly Change YTD Change
DJIA 16576.66 16805.41 17390.52 3.48% 4.91%
Nasdaq 4176.59 4483.72 4630.74 3.28% 10.87%
S&P 500 1848.36 1964.58 2018.05 2.72% 9.18%
Russell 2000 1163.64 1118.82 1173.51 4.89% .85%
Global Dow 2484.10 2470.50 2527.85 2.32% 1.76%
Fed. Funds .25% .25% .25% 0% 0%
10-year Treasuries 3.04% 2.29% 2.35% 6 bps -69 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • The U.S. economy grew at an annualized rate of 3.5% during the third quarter, according to the initial estimate by the Bureau of Economic Analysis. That was slightly less than Q2’s 4.6%, but still much stronger than during 2014’s first quarter.
  • As expected, the Federal Reserve’s monetary policy committee finally called a halt to new bond purchases, which have helped support the economy for the last six years by making credit easier to get. The statement said that despite improvements in the labor market and general economy, the committee sees inflation being held in check by lower energy prices. Therefore, it still anticipates the Fed funds interest rate will remain at its current level for “a considerable time.” However, that timetable could be accelerated by unanticipated upticks in inflation and/or employment (or pushed back if either declines).
  • As Fed bond purchases came to an end, the Bank of Japan went in the opposite direction, unexpectedly announcing it will expand its securities purchases. The move is designed to try to reduce the potential for deflation (Japan’s 1% annual inflation rate is far below the central bank’s 2% target). The added buying could make Japanese exports cheaper and help the country’s economy recover from the effects of a sales tax increase in the spring.
  • Durable goods orders fell 1.3% in September, according to the Commerce Department. However, much of that was due to a 3.7% decline in the typically volatile transportation sector; excluding transportation, new orders were down 0.2%.
  • Home prices rose in August, but the annual growth rate was the slowest in almost two years. The 0.2% increase in the S&P/Case-Shiller 20-City Composite Index represented a 5.6% annual increase from the previous August, down from July’s 6.7%.
  • Despite a 0.2% increase in personal income in the United States during September, personal consumption fell by an equal amount, according to the Bureau of Economic Analysis. The drop in personal consumption was the first monthly decline since January.

Eye on the Week Ahead

With quantitative easing officially at an end, what’s left of the Q3 corporate earnings season could receive more attention. And as the Fed watches the labor market closely to determine the timing of rate increases, investors will do the same with Friday’s jobs report. The results of Tuesday’s midterm elections also could influence the mood of the markets.

Data sources: Economic: Based on data from U.S. Bureau of Labor Statistics (unemployment, inflation); U.S. Department of Commerce (GDP, corporate profits, retail sales, housing); S&P/Case-Shiller 20-City Composite Index (home prices); Institute for Supply Management (manufacturing/services). Performance: Based on data reported in WSJ Market Data Center (indexes); U.S. Treasury (Treasury yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. Past performance is no guarantee of future results.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighted index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.