Equity Market Monitor - 1st Quarter 2013


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The price performance of the domestic equity market is generally measured by reference to stock indexes that aggregate the performance of multiple stocks. CME Group offers liquid futures contracts tied to a wide variety of frequently referenced “benchmark” stock indexes including the Standard & Poor’s® 500 (S&P 500®), the Dow Jones® Industrial Average (DJIA), the NASDAQ-100® and many more.

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Equity Market Monitor - 1st Quarter 2013

  1. 1. STOCK INDEXESEquity Market Monitor1st Quarter2013APRIL 6, 2013John W. Labuszewski John E. Nyhoff Richard CoManaging Director Executive Director Executive DirectorResearch & Product Development Research & Product Development Equity Products312-466-7469 312-930-2310 312-930-3227jlab@cmegroup.com john.nyhoff@cmegroup.com richard.co@cmegroup.com
  2. 2. The price performance of the domestic equity conditions coupled with the historically inversemarket is generally measured by reference to stock relationship between equity values and volatility. 2indexes that aggregate the performance of multiplestocks. CME Group offers liquid futures contracts S&P 500 Index & VIXtied to a wide variety of frequently referenced 1,600 90% 1,500 80%“benchmark” stock indexes including the Standard & 1,400 70%Poor’s 500 (S&P 500), the Dow Jones Industrial 1,300 60%Average (DJIA), the Nasdaq-100 and many more. S&P 500 1,200 50% VIX 1,100Many fundamental factors, including general 40% 1,000macroeconomic conditions, Fed monetary policy, 900 30%fiscal policy, foreign investment interest, to name 800 20%just a few, impact the price performance of these 700 10%stock indexes. 600 0% Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13This document provides a review of these factors asthey played out during the most recently completed S&P 500 VIXcalendar quarter. While we monitor activity in abroad spectrum of domestic stock indexes, the S&P Similarly, the DJIA posted a total return of 11.90%500 represents a central focus of this discussion. while the Nasdaq-100 generated a total return of 6.25% for the 1st quarter of the year. (SeeStock Price Action “Summary Data” table below.)Over the past decade, the domestic equity markets S&P 500 Sector Indexeshave fluctuated up and down within a very broad 1,450 Dec. 31, 2011 = 1,000.00trading range. This range has been defined by the 1,350depths plumbed in the wake of the “dot-com” crisisand subsequent “sub-prime mortgage crisis” – with 1,250highs put in just prior to the point where those 1,150situations broke in 2000 and in 2008, respectively. 1,050But as of the conclusion of the 1st quarter 2013, 950domestic equity markets, as measured by the S&P500, had broken into new all-time highs by a modest 850 12/30/11 1/30/12 2/29/12 3/31/12 4/30/12 5/31/12 6/30/12 7/31/12 8/31/12 9/30/12 10/31/12 11/30/12 12/31/12 1/31/13 2/28/13margin. The S&P 500 closed at 1,569.19 as ofMarch 28th and up from its value of 1,426.19 as ofthe conclusion of the 4th quarter 2012. This resulted IXY IXR IXE IXM IXVin a strong start for 2013 with a total return of IXI IXB IXT IXU10.58% for the 1st quarter. 1Meanwhile, the S&P 500 Volatility Index (VIX)declined all the way down to 12.70% as of March28th and off substantially from the value of 18.02% 2 Note that there is a consistent inverse relationshiprecorded at the conclusion of the 4th quarter 2012. between equity values and the VIX. This may be explained by the observation that equities often breakThis decline in volatility down to near historic lows, swiftly and suddenly as investors seek to liquidatemight be attributed to optimistic economic positions quickly in response to troublesome economic news. Thus, volatilities tend to advance in bear markets. On the other hand, equities tend to rally slowly and steadily. The steady influx of funds into the equity1 The total return associated with an index represents the markets as a result of retirement programs, combination of the return attributed to price fluctuations implemented with automated payroll contributions, such as well as the accumulation of dividend income. Thus, as 401Ks contributes to this effect. Thus, equity the total return associated with an index will generally markets tend to exhibit declining volatilities in bull exceed the price return. markets.1 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP
  3. 3. Breaking the S&P 500 into its major sectors, we find recent months … the unemployment rate remainsthat the health care sector led the way, advancing elevated.” 5 Unemployment is winding down,+15.77%. Health care issues were followed by reported at 7.6% for March 2013. But it doesconsumer staples (+14.67%); utilities (+12.95%); remain significantly above the Fed’s target of 6-½%.consumer discretionary stocks (+12.14%); energies(+11.66%); financials (+11.40%); and, industrials Employment Statistics 11% 67%(+10.69%). Less impressive performances were Labor Force Participationposted by the technology sector (+5.17%) and the 10% Unemployment Ratematerials sectors (+4.94%). 66% 9% 8%This price action may fundamentally be traced to 65%macro-economic conditions. Thus, we review 7%growth and employment prospects; inflation; 6% 64%monetary and fiscal policy; and, current and capital 5%account flows. 4% 63% Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13Growth and EmploymentFourth quarter 2012 GDP was most recently Unemployment Rate Labor Force Partcipation Source: Bureau of Labor Statistics (BLS)reported at a somewhat disappointing +0.4%. Butthe Federal Open Market Committee (FOMC)attributed this figure, after a rather robust advance The Fed does concede that it sees “downside risks toof +3.1% in the 3rd quarter, to “weather-related the economic outlook.” Certainly these risks aredisruptions” with an obvious nod to Superstorm implied by the ongoing decline in labor forceSandy “and other transitory factors” such as participation, reported at 63.3% for March 2013.inventory drawdowns. 3 Personal Savings & Sentiment Growth and Employment 9% 100 6% 11% 95 8% Consumer Confidence Personal Savings Rate 4% 10% 90 Qtrly Change in GDP Unemployment Rate 7% 2% 9% 85 6% 0% 80 8% 5% -2% 75 7% 4% -4% 70 6% 3% -6% 65 -8% 5% 2% 60 -10% 4% 1% 55 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 13 Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Real GDP (SA) Unemployment Rate Personal Savings Rate Consumer Sentiment Index Source: Bureau of Economic Analysis (BEA) Source: FRED Database & Bureau of Labor Statistics (BLS) Still, the Fed found solace in the facts thatThe FOMC suggested more recently on March 20th “[h]ousehold spending and business fixedthat we are now witnessing a “return to moderate investment advanced, and the housing sector haseconomic growth following a pause late last year.” 4 strengthened further.but fiscal policy has becomeThe Fed elaborates that while “[l]abor market somewhat restrictive.” 6conditions have shown signs of improvement in3 5 Federal Reserve Press Release dated January 30, 2013. Ibid.4 6 Federal Reserve Press Release dated March 20, 2013. Ibid.2 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP
  4. 4. Consumer confidence has been buoyed in recent S&P/Case-Shiller Housing Indexes 320months with the Michigan Index of ConsumerSentiment reported at 77.6 in February 2013 and up 280from 75.3 in February 2012. This sentiment is 240reinforced by a decline in the personal savings rateto 2.4% in January 2013 from 6.4% in December 2002012. 160 Retail Sector Activity 120 $185 1.50 80 Inventory:Sales Ratio $180 Jan-00 Sep-01 Jan-05 Sep-06 Jan-10 Sep-11 Nov-00 Jul-02 May-03 Mar-04 Nov-05 Jul-07 May-08 Mar-09 Nov-10 Jul-12 1.45 Retail Sales (Bil $) $175 1.40 $170 Los Angeles San Diego San Francisco 1.35 Denver Washington DC Miami $165 Chicago Boston Las Vegas 1.30 New York Comp-10 $160 Source: Standard & Poors $155 1.25 Further signs of growing momentum may be found $150 1.20 in housing values. The S&P/Case-Shiller Composite Jan-07 Jul-07 Jan-08 Jul-08 Jan-09 Jul-09 Jan-10 Jul-10 Jan-11 Jul-11 Jan-12 Jul-12 Jan-13 Index of 10 U.S. cities was reported for January 2013 as 8.4% above the trough recorded in March Real Retail Sales & Food Services SA 2013 but still 29.9% below the all-time peak from Total Business Inventory:Sales Ratio June 2006. Source: U.S. Census Bureau Industrial Sector ActivityFurther evidence of retail strength, accounting for 105 82% Industrial Production Indexperhaps 70% of domestic economic growth, is found 80% 100 Capacity Utilizationin strong retail sales activity. The February 2013 78%retail sales report is the strongest figure on record, 76% 95topping numbers recorded in late 2007 before the 74%full weight of the subprime mortgage crisis was felt. 90 72% 70% Housing Activity 85 2,500 68% 80 66% 2,000 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 Jul-07 Jul-08 Jul-09 Jul-10 Jul-11 Jul-12 000 Units 1,500 Index of Industrial Production Capacity Utilization 1,000 Source: St. Louis Federal Reserve FRED Database 500 This consumer optimism spilled over into the 0 industrial sector as the Index of Industrial Sep-04 Sep-06 Sep-08 Sep-10 Sep-12 Jan-04 May-05 Jan-06 May-07 Jan-08 May-09 Jan-10 May-11 Jan-12 Production was recorded for February 2013 at its highest level since April 2008. Similarly, capacity utilization rose to 78.3% in February 2013. Still, Building Permits Housing Starts Completions these figures fall a bit short of the peaks observed in Source: Dept. of Housing & Urban Development (HUD) late 2007 and early 2008 just prior to the onset ofMarch housing activity figures were generally quite the subprime crisis.upbeat with building permits rising to 946 thousandunits and housing starts up to 917 thousand unitsand the highest levels recorded since 2008.3 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP
  5. 5. U.S. Corporate Profitability the medium term will run at or below its 2 percent 120% $1,800 objective.” 7 100% Pre-Tax Profits (Billions) $1,600 Annualized Change 80% Indeed, both CPI and CPI ex-food and energy prices 60% $1,400 were recorded, on a seasonally adjusted (SA) basis, 40% at 2.0% in February 2013 and precisely equal to the $1,200 20% Fed’s stated objective. 0% $1,000 -20% Monetary Policy $800 -40% -60% $600 The Fed suggests that “a highly accommodative stance of monetary policy will remain appropriate for Q1 04 Q4 04 Q3 05 Q2 06 Q1 07 Q4 07 Q3 08 Q2 09 Q1 10 Q4 10 Q3 11 Q2 12 a considerable time after the asset purchase Annual Change Corporate Profits (Bil) program ends and the economic recovery Source: Department of Commerce strengthens … [thus, it is maintaining] … the target range for the federal funds rate at 0 to ¼ percentIndustrial growth was further reflected in strong and currently anticipates that this exceptionally lowcorporate profitability. Third quarter 2012 corporate range … will be appropriate at least as long as theprofits were recorded at $1.74 trillion. This is an unemployment rate remains above 6-½ percent,advance of 17.9% over the 2nd quarter 2012 figure inflation between one and two years ahead isand the highest observed performance yet to be projected to be no more than a half percentagerecorded. point above the Committee’s 2 percent longer-run goal, and longer-term inflation expectations continue Consumer Price Index (CPI) to be well anchored.” 8 6% 5% Benchmark U.S. Rates 7% Year-on-Year Change 4% 3% 6% 2% 5% 1% 4% 0% 3% -1% 2% -2% -3% 1% Jan-04 Aug-04 Mar-05 Oct-05 May-06 Dec-06 Jul-07 Feb-08 Sep-08 Apr-09 Nov-09 Jun-10 Jan-11 Aug-11 Mar-12 Oct-12 0% Jan-01 Jan-02 Jan-03 Jan-04 Jan-05 Jan-06 Jan-07 Jan-08 Jan-09 Jan-10 Jan-11 Jan-12 Jan-13 CPI - All Urban Consumers SA CPI ex-Food & Energy SA Source: Bureau of Labor Statistics (BLS) Target Fed Funds 2-Yr Treasury 5-Yr Treasury 10-Yr Treasury 30-Yr TreasuryInflation While Fed policy on the very shortest end of theThe Fed observed that “[i]nflation has been running curve remains fixed, they nonetheless “decided tosomewhat below the Committee’s longer-run continue purchasing additional agency mortgage-objective, apart from temporary variations that based securities at a pace of $40 billion per monthlargely reflect fluctuations in energy prices. Longer- and longer-term Treasury securities at a pace of $45term inflation expectations have remained stable … billion per month … Taken together, these actions[t]he Committee also anticipates that inflation over should maintain downward pressure on longer-term 7 Ibid. 8 Ibid.4 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP
  6. 6. interest rates, support mortgage markets, and help and is running at roughly half of the pre-crisisto make broader financial conditions more deficits which peaked in 2006.accommodative.” 9 Another interesting source of flow of funds data mayFiscal Policy be found in the U.S. Treasury Department’s Treasury International Capital (or “TIC”) database.The Fed comments that “fiscal policy has become This database tracks flows into and out of the U.S.somewhat restrictive.” 10 Certainly this restrictive The data is broken into foreign stocks, foreignstance is reflected in a decline the Federal deficit for bonds, U.S. stocks, U.S. corporate bonds, U.S.2012 of $10.1 trillion. While this is a considerable government agencies and U.S. Treasuries.figure and far in excess of all previous deficits priorto the onset of the subprime crisis, it nonetheless U.S. Current Account Deficit (Billions USD)represents some improvement over the deficits of $02009, 2010 and 2011. -$50 Federal Surplus/Deficit (Billions USD) $400 -$100 $200 -$150 $0 -$200 -$200 -$400 -$600 -$250 -$800 04 04 05 05 06 06 07 07 08 08 09 09 10 10 11 11 12 12 -$1,000 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 Q1 Q3 -$1,200 Source: Bureau of Economic Analysis (BEA) -$1,400 -$1,600 Capital flowing out of the U.S. by domestic or 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 foreign investors was rather negligible during the Source: Office of Management and Budget (OMB) entirety of 2012. Some $105.2 billion, on a net basis, flowed into the U.S. equity markets fromStill, the budget battle in Washington is not over as overseas in 2012. But the major story was thethe gap between the Democratic and Republican continued inflow of funds into the U.S. Treasuryfiscal visions are far apart. This battle may reach markets as overseas investors bought some $391.6crisis proportions around May 19th when the next billion of Treasuries, on a net basis, in 2012.debt limit crisis is projected to come to a head.Entitlement spending, income and estate taxes and Net US/Foreign Capital Flowsthe size of government remain controversial issues. $1,200 (Billions USD)Current & Capital Account Flows $700Just as incremental progress is achieved withrespect to the Federal spending deficit, we also see $200some improvement with respect to the U.S. currentaccount or trade deficit. The 4th quarter 2012 deficit -$300was reported at $100.4 billion. While not altogethercheerful, it represents a significant improvement onthe $133.8 billion deficit from the 1st quarter 2012 -$800 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 US Treasuries US Govt Agencies US Corporates US Stocks Foreign Bonds Foreign Stocks9 Source: U.S. Treasury TIC Database Ibid.10 Ibid.5 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP
  7. 7. Still, this represents a significant decline from the Dividends$703.7 billion flowing into Treasuries in 2010.Clearly, U.S. Treasuries continue to be regarded as a It has become chic to pay close attention to“safe haven” investment that is highly valued by corporate dividend policies in recent years. Thisforeign investors, despite generally low yields. focus represents a central tenet of the “fundamental indexing” movement that attempts to distinguishEquity Fund Flows investment opportunity on the basis of a relatively narrow number of broad fundamental indicators ofFinally, we may examine the inflow and outflow of corporate value, including dividend policies.equity market investments. This investment may besourced domestically or from overseas market Dividends have further become a major focus of theparticipants. equity trading community to the extent that interest rates have fallen to all-time or at least generationalActually, we find these indicators to be somewhat lows across most sectors of the yield curve. Theless than revealing to the extent that they are current low interest rate environment is, of course, aclosely correlated with price action. Certainly, retail function of Fed monetary policy in the wake of theinvestors are known to “chase” the market by subprime mortgage crisis. Thus, many investorsbuying in response to a bull trend. Likewise, they have focused on equity dividends to the extent thatare often known to exhibit a “herd mentality” by they have become very competitive with fixedheading for the exits in response to significant income instruments.market breaks. Dividend & Treasury Yields Equity Mutual Fund Net Cash Flows 5.5% (Billions USD) 5.0% $40 4.5% $30 4.0% $20 3.5% $10 3.0% 2.5% $0 2.0% -$10 1.5% -$20 1.0% Sep-08 Jan-07 Jun-07 Nov-07 Apr-08 Feb-09 Jul-09 Dec-09 May-10 Oct-10 Mar-11 Aug-11 Jan-12 Jun-12 Nov-12 -$30 -$40 Sep-11 Sep-12 Jan-11 Mar-11 May-11 Jul-11 Nov-11 Jan-12 Mar-12 May-12 Jul-12 Nov-12 Jan-13 Dividend Yield 10-Yr Treasury Yield Domestic Equities Foreign Equities Source: Investment Company Institute (ICI) A closely watched indicator of dividend value is a comparison of the dividend yield associated with theMutual fund investors responded well to the advance S&P 500 vs. the yield-to-maturity (YTM) of 10-yearin equity markets observed during the 1st quarter U.S. Treasury notes. Dividend yields for the S&P2012. While only January 2013 figures are available 500 as of the conclusion of 2012 were reported atas of this writing, some $37.9 billion flowed into 2.20% and still above the 1.90% rate associatedequity funds in January 2013. This was split nearly with 10-year U.S. Treasury notes. However, interestevenly between domestic and foreign equity funds rates have generally risen over the last quarter,and reversed the general withdrawal of funds consistent with the more optimistic economic tonewitnessed throughout most of 2011 and 2012. with 10-year yields breaching the key 2% markSome $32.8 billion in monies flowed into bond during the quarter before settling back.funds, including taxable and municipal bond funds,in January 2013. These extraordinary weak long-term rates are driven by “safe haven” investing in light of the ongoing European debt crisis and weakness in the emerging6 | Equity Market Monitor 1st Quarter 2013 | April 6, 2013 | © CME GROUP