Market Update: January 9, 2017

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  • Stocks, oil tick lower to begin week. The S&P 500 and Dow are slightly lower in early trading along with WTI crude oil ($52.59/barrel), which is down more than 2.5% on concerns about increasing U.S. production. Stocks closed higher on Friday, led upward by the technology sector (+1.0%), while telecom (-2.7%) dropped sharply as Treasury yields rose. The session capped off a 1.7% gain for the S&P 500 in the first week of the new year; the Dow (+1.0% for the week) came within one point of the much-watched 20,000 mark. Overnight, Asian markets were little changed; Japan’s Nikkei was closed for a holiday while the Shanghai Composite moved up 0.5%. European indexes are mostly lower in the afternoon session; the STOXX Europe 600 is down 0.5%, though the U.K.’s FTSE 100 is up 0.2% as the pound hits a 10-week low against the dollar. Finally, recent buying interest in Treasuries continues to push the yield on the 10-year note down, currently trading at 2.37%, and COMEX gold ($1178/oz.) is climbing 0.4% despite a modestly stronger dollar.

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  • Week ahead. The consumer is in focus this week, with reports on December retail sales and consumer confidence as well as November consumer credit highlighting an otherwise quiet week for data, as is typical for the week after the monthly jobs report. A handful of Federal Reserve Bank (Fed) speakers are on tap this week after a year-end and early-year lull, including an appearance by Fed Chair Janet Yellen on Thursday at a town hall event in Washington, D.C. Overseas, China will release its December economic data this week, and central bank meetings in Brazil, South Korea, and Poland are on tap, with Brazil expected to cut rates. In addition, the Q4 2016 earnings reporting season unofficially begin, as firms begin to report sales and earnings for Q4 2016 and guidance on 2017.
  • Earnings season gets underway this week, and it looks like it will be another good one. This week, we preview fourth quarter earnings season, which may mark the return of earnings growth to the energy sector. Thomson-tracked consensus estimates for the quarter are calling for a 6.1% year-over-year increase in S&P 500 earnings. Based on typical upside, double-digit earnings growth may be within the realm of possibility. We have several reasons to be optimistic including resilient estimates, an improved pre-announcement ratio, good manufacturing data, and the energy rebound.
  • The biggest story of earnings season besides energy’s turnaround will likely be financials. The sector’s outlook and estimates have both improved in recent months as rising interest rates, stock market gains, higher oil prices, and narrowing credit spreads all help buoy the sector’s profit picture. Consensus estimates are calling for a market-leading 15.7% year-over-year increase, while more help could be on the way later this year in the form of deregulation.
  • A closer look at January. This week, we take a look at the many significant events that are set to take place during the first month of the year. The jobs report last Friday was initially viewed negatively, but after some time to think about it, the market decided the miss wasn’t so bad. Other big events this month include first quarter earnings, Chinese New Year, and the Federal Reserve meeting at the end of the month to decide interest rate policy.
  • The most bullish technical formation since 1982? The S&P 500 completed a very rare technical pattern last year for only the third time in history–a bullish outside year. This technical formation happens when the high of a year is greater than the high from the previous year and the low from the year is lower than the low from the previous year. Going back to 1928¹, this has only happened in 1935, 1982, and 2016. What does it mean? Well, in 1936 the S&P 500 was up 27.9%, and in 1983 the S&P 500 gained 17.3%–not to mention that a huge 18-year bull market kicked off.
  • Dow so close, yet so far. The Dow traded as high as 19,999.63 on Friday in its quest to finally hit the 20,000 mark. Eventually it sold off slightly and closed 0.2% away from this round number. Our stance remains the same; big round numbers don’t mean much to investors over the long run. If anything, now is a chance to take a step back, re-evaluate, and remember how far we’ve come during this bull market. But 20,000 by itself simply doesn’t mean anything to long-term investors.
  • New highs, but trouble brewing? The S&P 500 closed at a fresh all-time high on Friday for the first time since December 13. Also, the S&P 500 has now gone 60 consecutive days without a 1% drop, the longest such streak since 66 days in a row in the summer of 2014. Looking under the surface though, breadth was very weak as small and mid caps lagged. In fact, there were more NYSE decliners than advancers on Friday–even though the S&P 500 made a new high. Should this trend continue it could be a major worry, and it is something we will watch very closely.
  • Chinese reserves fall. As expected, official Chinese currency reserves declined to just over $3 trillion, down from $4 trillion at the high in the middle of 2014. China has been reducing its reserves, by selling U.S. treasury bonds and other securities to support its economy, and most importantly the yuan, against further depreciation. The yuan rallied at the end of last week, but resumed its decline as the markets opened Monday morning.

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Monday

  • Eurozone: Unemployment Rate
  • German Chancellor Merkel Speech on Future of Europe
  • China: CPI (Dec)
  • China: Money Supply and New Loan Growth

Tuesday

  • NFIB Small Business Optimism Index

Wednesday

  • Trump News Conference
  • Brazil: Central Bank Meeting (Rate Cut Expected)

Thursday

  • Initial Claims (1/7)
  • Yellen (Dove)
  • Harker (Hawk)
  • China: Imports and Exports (Dec)
  • Japan: Economy Watchers Survey (Dec)

Friday

  • Retail Sales (Dec)
  • Consumer Sentiment and Inflation Expectations (Jan)
  • Harker (Hawk)

Sunday

  • Japan: Machine Orders (Nov)
  • Japan: PPI (Dec)

 

 

 

 

 

 

 

 

 

¹ Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1928 incorporates the performance of predecessor index, the S&P 90.

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples. This research material has been prepared by LPL Financial LLC.

 

 

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