PMC Market Commentary: September 19, 2014

A Macro View – Market at Crossroad

After shaking off geopolitical tensions, the U.S. equity market advanced to another new high with the S&P 500 Index surpassing 2,000 for the first time on August 26th. Since then, however, it has been fluctuating within a narrow range around the 2,000 index level with no decisive move in either direction.

There has been no lack of potential market-moving events during the past three weeks, though. The Federal Open Market Committee (FOMC) made little changes to its policy statement and kept the phrase “considerable time” in its monetary policy about keeping short-term interest rates low, the focal point of a heated debate among market commentators whether “considerable time” would be dropped in the statement. The Dollar Index jumped more than 3%, a very significant move for a currency index within such a short period. The surging U.S. dollar hit commodity prices hard, helping push the Commodity Index to a 52-week low. The sudden strength in the U.S. dollar is not an indication of sudden upgrade of U.S. economy, but is driven by weakness of other major currencies. Deflation concerns in the Eurozone pushed EUR/USD (Euro/U.S. Dollar) below the 1.30 mark, the Scotland independence uncertainty hurt the Sterling, and the continuing-struggling Japanese economy sank the Yen. A strong dollar hurts the earnings of U.S. companies with significant overseas operations, but is very helpful to contain inflation. The Alibaba (BABA) IPO, the largest IPO in history for a U.S. listed company , went smoothly and caused little disruption to the market so far. The U.S. equity market again displays its incredible resilience and depth in digesting and absorbing various events and shocks.

At the 2,000 level, the S&P 500 Index equals a yearly total return of about +10% for 2014 and trades at around 15x 12-month forward earnings, both in par with long-term averages of the U.S. equity market. September to October is historically a volatile period for the U.S. equity market – Lehman bankruptcy, Black Monday 1987, and 1929 Market Crash, to name a few, all took place in September or October. Notwithstanding historical coincidence, the calendar itself plays an important role for the market volatility. Trading volumes of the preceding summer months like July and August are generally low and as a result many price actions during these months need to be reinforced or reversed in September and October when many market participants come back from summer vacations. More importantly, September and October are traditionally the calendar “rollover” period for company earnings. As the calendar is about to turn to a new year, companies start to issue next-year earnings guidance and as for traders, next-year earnings multiples start to be used for their valuation metrics.

Historically, when the stock market reaches a new milestone, it generally takes some time to go back and forth around it. We all remember how many dozens of times the stock market went back and forth around Dow Jones Industrial Average 10,000 level and how many years it was stuck there. Hopefully, it will not take as nearly long for the market to decisively leave the 2,000 index level of the S&P 500 behind once and for all.

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