Market Update: June 26, 2017

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Last Week’s Market Activity

  • After closing once again at record levels last Monday, the Dow and the S&P 500 Index battled a wave of sector rotation for the balance of the week, finishing higher by the slightest of margins.
  • It was the 2nd consecutive weekly gain for the S&P 500, as increases in healthcare (+3.7%) and technology (+2.3%) offset weakness in the energy (-2.9%), financials (-1.8%), and utilities (-1.8%) sectors.  Positive news on drug development and potential changes to the Affordable Care Act drove healthcare higher, while continued weakness in WTI crude oil ($43.00; -4.0% for the week) pressured the energy sector.
  • The yield on the 10-year Treasury fell to 2.14%, its second lowest close of 2017, pressuring the U.S. dollar, which edged down -0.2% on Friday.

Overnight & This Morning

  • Asian stocks rose for a third day, led by technology companies.  The MSCI Asia Pacific Index rose +2.0% and equity markets in China and Hong Kong had gains approaching 1.0%. In Japan, The Nikkei managed to climb despite a report from the Bank of International Settlements warning of dollar denominated risk on bank balance sheets.
  • European stocks rebounded from three weeks of losses. German business confidence hit a record in June, but Italy had to bail out two banks totaling $19 billion.
  • Commodities – WTI crude oil rose, trimming its biggest monthly decline in one year. Gold extended its decline to the lowest level in almost six weeks.
  • U.S. stock futures are up slightly as the dollar climbed and Treasury yields jumped after several Federal Reserve officials suggested further rate increases.

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Key Insights

  • Mixed signals. The financial markets are sending mixed signals, trading within a tight range in an extended expansion. The debate now centers on if the U.S. economy can continue to exhibit growth in output and profits (signal from stocks) or it may slip into a recession (signal from Treasuries). Our view is that though the growth rate in manufacturing may have peaked, we expect Purchasing Manager Indexes (PMI) to remain in expansion territory. While auto sales may be down ~5.0% from last year, the rise in household formation suggests pent up demand remains in the housing market. Finally, with solid employment levels and improving wages, consumption is well-positioned to support growth and any clarity on regulation, infrastructure, and tax plans could provide an additional boost.
  • Brexit. Friday marked the 1st anniversary of the controversial Brexit vote, which called for the U.K. to leave the European Union (EU).  To mark the occasion, the pound sterling rose +0.2% to $1.27, paring its weekly decline, and the FTSE 100 Index fell -0.2% on Friday. While the U.K. is the largest importer of the EU countries, the FTSE 100 is largely comprised of exporters, with 2/3rds of its revenue generated overseas.  This helps explain why the approximately 15.0% drop in the pound sterling was accompanied by a rise of a similar magnitude (+17.0%) in the FTSE 100 over the past year.

Macro Notes

  • Technicals continue to look strong. One of the strongest aspects of this equity bull market has been that the technicals have and continue to support higher prices. This week we take a closer look at the global bull market and why broad participation suggests it still has legs.
  • 41 weeks and counting. The S&P 500 has now gone 41 straight weeks without closing lower by 2% or more, but that’s not even the most surprising point.

MonitoringWeek_header

Monday

  • Durable Goods Orders (May)
  • Chicago Fed National Activity Report (May)
  • Cap Goods Shipments and Orders (May)
  • Dallas Fed Mfg. Report (Jun)
  • ECB: Draghi
  • BOE: Carney
  • BOJ: Kuroda

Tuesday

  • Conference Board Consumer Confidence (Jun)
  • Richmond Fed Mfg. Report (Jun)
  • Italy: Mfg. & Consumer Confidence

Wednesday

  • Advance Report on Goods Trade Balance (May)
  • Wholesale Inventories (May)
  • Pending Home Sales (May)
  • France: Consumer Confidence (Jun)
  • Eurozone: Money Supply (May)
  • Itally: PPI & CPI (Jun)
  • Bank of Canada: Poloz
  • Japan: Retail Sales (May)

Thursday

  • GDP (Q1)
  • Germany: CPI (Jun)
  • Eurozone: Consumer Confidence (Jun)
  • BOJ: Harada
  • Japan: National CPI (May)
  • Japan: Industrial Production (May)
  • China: Mfg. & Non-Mfg. PMI (Jun)

Friday

  • Personal Income (May)
  • Consumer Spending (May)
  • Chicago PMI (May)
  • Core Inflation (May)
  • UK: GDP (Q1)
  • France: CPI (Jun)
  • Germany: Unemployment Change (Jun)
  • Eurozone: CPI (Jun)
  • Canada: GDP (Apr)
  • Japan: Vehicle Production (May)
  • Japan: Housing Starts (May)
  • Japan: Construction Orders (May)

 

 

 

 

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. 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. This research material has been prepared by LPL Financial LLC.

Market Update: March 13, 2017

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  • Traders cautious ahead of Fed decision. The S&P 500 is modestly lower this morning after advancing Friday, led by utilities (+0.8%) and telecom (+0.7), but snapping a six-week winning streak. Energy (-0.1%) lagged, but held up well given the 1.6% drop in the price of oil. Investors are trading cautiously ahead of the Federal Open Market Committee (FOMC) meeting, which begins tomorrow; the market has priced in a 25 basis point (0.25%) rate hike. Overnight, Asian markets were led higher by the Hang Seng (+1.1%) and Shanghai Composite (+0.8%); Korea’s KOSPI (+1.0%) continued to climb after the country’s president was removed from office on Friday. European exchanges are mostly higher in afternoon trading, with the STOXX Europe 600 up 0.4%. Meanwhile, WTI crude oil ($48.30/barrel) is higher after last week’s slide, COMEX gold ($1203/oz.) is up modestly, and the yield on the 10-year Treasury note is up 0.01% to 2.59%.

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  • Busy week ahead in a very busy month. March is an unusually busy month for global markets. This week, the FOMC meeting, along with Bank of Japan and Bank of England meetings, are accompanied by an election in the Netherlands, a press conference by Chinese Premier Li, and a ton of key U.S. economic data (retail sales, CPI, housing starts, leading indicators). President Trump will release his fiscal year 2018 budget document, the G-20 finance ministers meet in Germany, and the U.S. will hit its debt ceiling.
  • FOMC preview. This week, we ask and answer key questions that investors may have about the Fed and monetary policy ahead of the Federal Open Market Committee (FOMC) meeting. With a 0.25% rate hike fully priced in, markets will want to gauge the pace and timing of rate hikes over the rest of 2017 and into 2018, as well as Fed Chair Yellen’s thoughts on fiscal policy and the impact on monetary policy.
  • How much does the current bull market have left in the tank? The bull market celebrated its eighth birthday last Thursday, March 9. During that eight-year period, the S&P 500 rose 250% in price and more than tripled in value (including dividends), leaving many to ask the question: How much does this bull run have left? We try to help answer that question by looking at some of our favorite leading indicators. Although valuations are rich and policy risks are high, none of our favorite leading indicators are sending signals suggesting the bull market is nearing its end.
  • The weekly win streak is over. The S&P 500 ended with a slight gain on Friday to close the week down 0.4% – just missing out on the first seven-week win streak since late 2014 and ending a six-week win streak in the process. The big move last week came in crude oil, as it sank more than 9% for the week – the largest weekly loss since right before the election. Small caps, as measured by the Russell 2000, fell 2.1% and high yield also saw a big drop. Many have noted that weakness in energy, small caps, and high yield could be a warning sign for large caps. We will continue to monitor these developments.

MonitoringWeek_header

Monday

  • ECB’s Mario Draghi Speaks in Frankfut
  • China: Retail Sales (Feb)
  • China: Fixed Asset Investment (Feb)
  • China: Industrial Production (Feb)

 Tuesday

  • Small Business Optimism Index (Feb)
  • Germany: ZEW (Mar)

 Wednesday

  • Empire State Mfg. Report (Mar)
  • CPI (Mar)
  • Retail Sales (Mar)
  • FOMC Decision (Rate Hike Expected)
  • FOMC Economic Forecasts and “Dot Plots”
  • Yellen Press Conference
  • General Election in the Netherlands
  • China’s Premier Li Holds Annual Press Conference

 Thursday

  • Philadelphia Fed Mfg. Report (Mar)
  • US Debt Ceiling Reinstated
  • President Trump to Release His FY 2018 Budget
  • UK: Bank of England Meeting (No Change Expected)
  • Japan: Bank of Japan Meeting (No Change Expected)

 Friday

  • Index of Leading Indicators (Feb)
  • G20 Finance Ministers Meeting in Germany

 

 

 

 

 

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. 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. This research material has been prepared by LPL Financial LLC.

Market Update: December 12, 2016

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  • Stocks search for direction as oil spikes. Global markets are mixed in Monday sessions, failing to get a lift from a 4.5% rise in WTI crude oil ($53.83/barrel). Oil’s surge comes after non-OPEC producers agreed to cut output by 585,000 barrels per day. Domestic indexes are mixed after the S&P 500 rose over 3% last week on strength in the heavily weighted technology and financials sectors. Looking ahead, investors will be watching the Federal Open Market Committee (FOMC) this week; the market is expecting a rate hike of 25 basis points (0.25%). Overseas, Chinese markets sold off as the Shanghai Composite lost 2.5% and the Hang Seng shed 1.4%; Japan’s Nikkei gained 0.8%. Weakness in China came on the heels of a ban on leveraged stock purchases by the country’s insurers. European markets are near flat with the exception of Italy’s MIB (+0.9%), continuing its rally after the failed constitutional referendum. Meanwhile, COMEX gold ($1161/oz.) is modestly lower, extending a five-week slide, and the yield on the 10-year Treasury note is up to 2.50%.

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  • Oil rallies on OPEC and non-OPEC news. Consistent with the Organization of Petroleum Exporting Countries (OPEC) meeting on November 30, eleven non-OPEC producers announced plans to cut OPEC production, though possibly below the 600,000 barrel per day production cut promised. In addition, Saudi Arabia suggested that it might cut production even more than it had announced on November 30. The market views compliance with new production quotas as key to maintaining prices at current levels, if not higher.
  • FOMC and much, much more. The Federal Reserve Banks’s (Fed) FOMC will hold its eighth and final meeting of 2016 on Wednesday, and it will likely raise rates by 25 basis points (0.25%), a move that is fully priced in by the fed funds futures market. In addition, the FOMC will release a new set of dot plots and economic forecasts for 2017 and beyond. But that’s not all. This week is chock full of key economic data for November and December, including reports on housing, inflation, consumer spending, and manufacturing. Overseas, the key ZEW report in Germany and the Tankan survey in Japan are due out, and China will continue releasing its data set for November. The Bank of England meets this week as well and is expected to stand pat on rates. Mexico’s central bank is likely to raise rates, as inflation is heating up south of the border.
  • FOMC FAQ. This week we’ll cover several key questions ahead of this week’s eighth and final FOMC meeting of 2016. While a rate hike later this week is fully priced in by markets, there are still plenty of questions surrounding the Fed as 2016 turns into 2017.
  • Growth starting to look cheap versus value. Based on the Russell indexes, following value’s outperformance this year, growth is now as cheap relative to value as it has been at any point since the financial crisis. We still think style balance, or a slight growth overweight, are prudent at this point in the business cycle, but note that relative valuations (growth is at a 13% premium to value, about half its 15-year average) and the magnitude of the financials-driven value rally may make it difficult for value to continue its momentum.
  • Small caps starting to get expensive. Following recent strength, small caps are starting to look expensive versus their large cap counterparts. The Russell 2000 is now trading at a 42% premium to large caps on a forward price-to-earnings basis, about ten percentage points above the 15-year average premium. We have a slight positive bias toward small caps in the first half of 2017 on prospects for corporate tax reform and less foreign trade risk, but valuations and the magnitude of the small cap rally may make it difficult for small caps to continue their momentum and we would not be surprised if cap leadership reversed later in 2017.
  • Surging bond yields have not spooked stock market investors. This week, we look at when rising interest rates might begin to hurt stock prices. It is logical to think higher rates will eventually slow the economy as borrowing costs rise and inflation erodes purchasing power. But given the still low rate environment, the market is interpreting higher interest rates as a signal of improving growth expectations, not worrisome inflation, and we do not think rising interest rates put the bull market at risk.
  • The rally continues. The S&P 500 gained 3.1% last week and closed higher every single day. You have to go back to June 2014 the last time all five days of the week were higher. It didn’t end there though, as both the Nasdaq and Dow also were green each day, and closed Friday at new all-time highs. The Dow even made a new all-time high all five days, something it hasn’t done for 17 years. The S&P 500 is up six straight days for the first time since June 2014, and it hasn’t been up seven in a row since September 2013. Lastly, momentum has been very powerful the past few years as the previous 10 times the S&P 500 was up more than 3% for the week (like it was last week), it was green the following week.
  • How long can the bull market go? With new highs being made across the board for U.S. equities, and European markets finally starting to potentially turn the corner as we noted in last week’s blog post, the big question is how long can this current bull market last? As we will lay out in our 2017 Outlook, we feel that stocks should produce mid-single-digit returns[1] and the bull market could continue through at least 2017.

MonitoringWeek_header

Monday

  • China: Retail Sales (Nov.)

Tuesday

  • NFIB Small Business Optimism (Nov)
  • Germany: ZEW (Dec)
  • Japan: Tankan (Q4)

Wednesday

  • Retail Sales (Nov)
  • FOMC Statement
  • FOMC Economic Forecasts and Dot Plots
  • Yellen Press Conference
  • Japan: Nikkei Mfg. PMI (Dec)

Thursday

  • Empire State Mfg. Report (Dec)
  • Markit Mfg. PMI (Dec)
  • CPI (Nov)
  • Philadelphia Fed Mfg. Report (Dec)
  • Eurozone: Markit Mfg. PMI (Dec)
  • European Union: Leader Summit in Brussels
  • UK: Bank of England Meeting (No Change Expected)
  • Mexico: Central Bank Meeting (Rate Hike Expected)

Friday

  • Housing Starts and Building Permits (Nov)
  • Lacker (Hawk)

 

 

 

 

 

[1] We expect mid-single-digit returns for the S&P 500 in 2017 consistent with historical mid-to-late economic cycle performance. We expect S&P 500 gains to be driven by: 1) a pickup in U.S. economic growth partially due to fiscal stimulus; 2) mid- to high-single-digit earnings gains as corporate America emerges from its year-long earnings recession; 3) an expansion in bank lending; and 4) a stable price-to-earnings ratio (PE) of 18 – 19.

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.

Is This 100-year Old Indicator Suggesting Market Strength?

The Dow Jones Industrial Average (Dow) gained for the sixth consecutive day yesterday and closed at a new all-time high for the third straight day. The Dow Jones Transports (Transports), meanwhile, had another big day yesterday and has been one of the top performers since the election. The Dow and Transports will forever be linked, as they are the two components to Dow Theory. Charles Dow created the Dow Theory in the late 1800’s, and it revolves around needing confirmation from both industrial and transports before establishing market direction. Think about it—if both the industrial and transports are strong, this likely suggests an improving economy. The flip side is if both are going lower, the economy is weakening.

Another way to look at the relationship between the two indexes is to compare them on a relative strength chart. When the ratio of the Transportation Index to the Dow increases, this means that transports are outperforming. We have found that when this ratio on a weekly chart moves above its 40-week simple moving average for more than three weeks, stocks tend to move higher over the next year. This signal triggered recently; the last time it happened was in late 2012, right before a huge equity rally in 2013.

chart-1

Looking at historical data going back to 1979, this signal triggered 20 times. Take note, we removed the two largest recessions over the past 20 years, as we don’t see any signs of a coming recession. The S&P 500 gained more than 9% on average six months later and was higher 80% of the time. Going out a full year, the S&P 500 has been up more than 16% on average and higher all 20 times.

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Could this newfound strength from the transports be telling us the economy could be set for strong improvement as we head into 2017? It very well could be, and this could be another reason to expect the equity bull market could possibly continue as well.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment.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. Stock investing involves risk including loss of principal. Because of its narrow focus, specialty sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 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. The Dow Jones Industrial Average Index is comprised of U.S.-listed stocks of companies that produce other (non-transportation and nonutility) goods and services. The Dow Jones Industrial Averages are maintained by editors of The Wall Street Journal. While the stock selection process is somewhat subjective, a stock typically is added only if the company has an excellent reputation, demonstrates sustained growth, is of interest to a large number of investors, and accurately represents the market sectors covered by the average. The Dow Jones averages are unique in that they are price weighted; therefore, their component weightings are affected only by changes in the stocks’ prices. This research material has been prepared by LPL Financial LLC.

How Do Investors Feel About Stock Markets?

© Cristian Baitg/Getty Images
© Cristian Baitg/Getty Images

The American Association of Individual Investors (AAII) surveys investors weekly about whether they are bullish, bearish, or neutral on stock markets for the next six months. Last week, the majority of participants indicated they were neutral. There was less bullish sentiment than the previous week, but bulls maintained a slight edge over bears:

  • Bullish: 27.2 percent
  • Neutral: 47.1 percent
  • Bearish: 25.8 percent

The AAII also asked whether participants were better off, worse off, or as well off as they had been eight years ago (early in the Great Recession). More than one-half (54 percent) said they were better off. The remainder was almost evenly split. Twenty-four percent indicated they were not better off, and 23 percent said they were as well off.

Will Eight be Great for the Bull?

The bull market turns seven. Last Wednesday, on March 9, 2016, the bull market officially celebrated its seventh birthday. During that seven-year period, the S&P 500 nearly tripled, gaining 194% in price and producing a total return of 241%. Although our expectations for the stock market in 2016 are for only modest S&P 500 gains, we do not see the warning signs that have signaled the end of past bull markets and would not be surprised at all if the current bull market celebrates its eighth birthday one year from now.

QUICK HISTORY LESSON

Despite all of the time that has passed, memories of the stock market collapse in 2008 and 2009 remain vivid for all of us. Set up by the severe 2008 – 09 decline, this bull market has been one of the strongest in history. Going back to World War II, only five bull markets have even made it five years, and only two of those celebrated their seventh birthday, making the current bull market the third longest over the past 70 years [Figure 1].

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The previous two bulls to reach the seven-year milestone were June 1949 to August 1956 and October 1990 to March 2000. The rally in the 1950s lasted only one more month than the current bull, but the one in the 1990s lasted two more years. The current bull would have to stay intact until mid-2018 and propel the S&P 500 to over 3440 (up from 2022 on March 11, 2016) to match that epic bull market’s duration and performance.

When asked what the biggest driver of these gains has been, many might respond with Federal Reserve (Fed) policy. Certainly, monetary policy stimulus—including quantitative easing (QE) and the so-called ZIRP (zero interest rate policy)—has played a role in powering this bull. But S&P 500 earnings have more than doubled during the past seven years, and thus provided a good deal of support for the market [Figure 2]. Corporate America’s ability to drive profit margin expansion with efficiency gains during this decade is perhaps one of the most underrated pieces of the stock market’s seven-year run.

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Higher valuations have also played a big role, not surprising given the extreme amount of pessimism at the lows seven years ago. On a trailing four-quarter basis, price-to-earnings ratios (PE) bottomed between 8 and 9 during March 2009 before spiking to 17 later that year [Figure 3]. Interestingly, the S&P 500’s PE is right around 17 today after peaking near 18 last year. Although a PE near 17 may seem high, it is roughly in-line with the average since 1980, and low interest rates are supportive of higher valuations. With some help from the possible resumption of earnings gains in the second half of 2016, we think valuations may be low enough to potentially keep this bull market going at least until its eighth birthday.

SECTOR LEADERSHIP

It comes as no surprise that more economically sensitive sectors have led this bull market. Consumer discretionary has led the way with a 378% advance (434% total return), roughly doubling the performance of the S&P 500 and far outpacing financials, the next best sector on a price return basis [Figure 4]. Consumer discretionary benefited from the automotive sector coming back from the edge of the abyss during the financial crisis, from the rebound in consumer wealth (both housing and financial assets), and the meteoric rise of internet retail. Consumer discretionary has been a consistent winner, placing near the top of the sector leaderboard for the one-, three-, and five-year trailing periods.

What may come as a surprise is the fact that financials are so far behind consumer discretionary during this bull. Financials had the steepest decline into the March 2009 lows; at those lows, the sector was pricing in extremely onerous scenarios, such as nationalizing banks, which are unthinkable today. Financials did lead all sectors from those bear market lows through the end of 2009, but began to lose relative strength in 2010 due to low interest rates and new (and tough) regulations, pressures that have not let up since.

Technology and industrials also solidly outperformed during this period as the market priced in economic recovery coming out of the deep recession. Lagging over the past seven years were the more defensive, dividend-paying sectors that investors had turned to on the way down during the crisis, i.e., telecom, up 90%, and utilities, up 113%. But no sector has done worse than energy, up only 45% and a victim to the sharp drop in oil and natural gas prices since the summer of 2014. Remarkably, the energy sector is flat since January 2010.

We continue to favor the technology and healthcare sectors and are waiting for opportunities to become more positive on energy and industrials. Our neutral view on consumer discretionary reflects its historical pattern of mixed performance during the latter stages of bull markets and economic cycles. Furthermore, the sector’s gains from falling oil prices may be mostly behind it. Our recommended underweight sectors include financials, materials, and utilities.

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NO RECESSION, BUT SOME CONCERNS

The indicators we watch that could signal the potential end of the economic cycle and an oncoming recession are currently not showing worrisome signs. Collectively, our Five Forecasters are not showing any cause for concern. We do not see evidence of the excesses in borrowing, spending, or confidence that have ended economic expansions over the past several decades (discussed here). The majority of the indicators we use to assess where we are in the business cycle point to mid-cycle or mid-to-late, rather than late.

That said, although the S&P 500 is one good day away from breakeven for the year, we do have some concerns about this market and maintain a slightly cautious stance in the short term:

1. China. We continue to worry about the potential for China to devalue its currency and spark a currency crisis. A trade war is also a concern given the rhetoric coming from the U.S. presidential campaign trail. At the same time, China’s recent support of the yuan and talk of financial reforms are encouraging.

2. Oil. Oil’s recent resurgence has been a big part of the stock market rebound. Oil is up more than 40% since February 11, 2016 (just a month) and is back to near the $40 level. We are concerned that the rally, based on little more than talk of a production freeze among Russia and OPEC members, lacks a strong enough foundation from production cuts to sustain itself.

3. The Fed. Stocks have historically done quite well after the Fed starts rising interest rates, which it did in December 2015. That said, there is a risk that the Fed hikes rates too aggressively and upsets financial markets and the U.S. economy. (See today’s Weekly Economic Commentary for a Federal Open Market Committee [FOMC] meeting preview.)

4. Earnings. Fourth quarter 2015 earnings season was disappointing. The declining drag from the strong U.S. dollar and smaller energy declines are expected to help earnings growth improve throughout 2016, but the mid-singledigit earnings gains we had initially anticipated for this year may be delayed until 2017.

CONCLUSION

Stocks may not produce scintillating gains in 2016, but we do expect the bull market to continue despite its age and the aforementioned risks. Bull markets don’t die of old age, they die of excesses. We do not see warning signs that might signal the end of the economic cycle or the now seven-year-old bull market.

Provided by LPL Financial

(Source: LPL Financial)

Any Bulls Left?

The number of bulls is dwindling. In periods of extreme market volatility such as we have experienced in recent weeks—and Friday, January 15, 2016, in particular, when the Dow was down over 500 points at one point before paring losses—we find it helpful to try to take some of the emotion out of our investment decisions. As difficult as that can be at times, this approach can help us reduce the chances of selling at the bottom, even though the natural reaction for many is to panic and hit the sell button.

One way to help measure how close to the bottom stocks may be is to use sentiment indicators to identify extremes in bullishness and bearishness. When the bulls are all washed out, in theory, there are few sells left to put more pressure on stocks. In this case, extreme bearishness can be viewed as a contrarian indicator and may signal that selling could be near an end.

Technical analysis can also help identify key price levels that may signal breaks in either direction. These tools can give us an idea of when the selling might stop and a reversal might ensue. An objective look at some data can be reassuring and help us make better investment decisions.

A closer look at sentiment indicators suggests most of the selling may be behind us. We haven’t seen full panic—or capitulation—but we have gained some confidence that the upside opportunity for stocks may outweigh the downside.

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FEW BULLS LEFT

The latest American Association of Individual Investors (AAII) survey indicates an extreme scarcity of bullish investors, even more extreme than was observed in the summer of 2015. In fact, based on the latest AAII survey, bulls are as scarce as they were in 2009 and 2003, the last two major market bottoms. The reading of bulls during the latest week came in at 18%, the lowest level since April 2005. Bears have spiked as well, up to more than 45%, the most since April 2013.

Using weekly data, the eight-week moving average of the bulls is below 26% [Figure 1]. For comparison, this was the lowest since March 2009 during the depths of the financial crisis. The only other time it was less than 26% over the past 20 years was March 2003. This extreme level of bearish sentiment may suggest a lack of new sellers and that stocks may be nearing a bottom.

DERIVATIVES POSITIONING

Another way to assess investor sentiment is by looking at the ratio of bullish to bearish positioning in the derivatives market. Recently, positioning in the derivatives markets has become much more bearish, according to data from the Chicago Board Options Exchange (CBOE). Coupled with the action in the AAII sentiment poll, this shows how dour most view the stock market currently. From a contrarian point of view, this could be a sign that a bottom may be near.

ASSESSING TECHNICAL DAMAGE

We can also use more traditional technical analysis to assess how likely it is that stocks are nearing a bottom. Over the past few weeks, the S&P 500 Index has incurred some technical damage, with the index now testing its August 25, 2015, low at 1867. From a technical perspective, a sustained break below the 1867 support level would establish a lower low, indicating the downtrend may continue.

Conversely, a bounce off of the 1867 level would indicate stabilization by setting up a higher low, increasing the potential for a short-term bottoming process.

Another form of technical damage occurred on January 8, 2016, when the shorter-term moving average (50 periods) crossed below its longerterm moving average (200 periods) on the daily price chart (which some refer to as a “death cross”). This is the second time this cross has occurred over the past six months—the first occurred on August 28, 2015, very close to the stock market lows of August and 2015 [Figure 2].

Since 1980, the S&P 500 has experienced 16 of these crosses. In 11 of those instances, the S&P 500 was higher 3 months later, with an average gain of 4.7%. The numbers improve after 6 months, with gains in 10 out of 15 instances, and an average gain of 7.4%. And over 12 months, stocks are only down if accompanied by recessions. This indicator has provided many false bear market signals over time and often indicated the approach of a rebound.

CAPITULATION?

Evidence of “capitulation,” essentially marking investors as throwing in the towel, can also signal the end of selling may be near. When the S&P 500 Index was at 1867 on August 25, 2015, many technical and sentiment stock market indicators were at extreme levels on heavy trading volume and were characterized by some as capitulation. This essentially means investors have all headed for the exits, leaving no one else to sell (in theory) and signaling a potential tradable stock market bottom.

The Relative Strength Index (RSI) can assess capitulation by measuring the depth of oversold conditions. A greater frequency of steep declines over a period (in this case we use 14 days) coincides with a low RSI. The RSI at just over 18 on August 24, 2015, was considered extremely oversold, compared with the recent low back on January 8, 2016, at 29. Holding this level would be considered a higher low, indicating the potential start of a short-term bottoming process and increasing the possibility that stocks move higher.

We can also look at the percent of S&P 500 companies above their 50-day moving average to assess capitulation. On August 24, 2015, this measure stood at 8.2, an extremely oversold, capitulation-like reading, compared with the more recent low of 12.7 on January 8, 2016. Again, should this level hold, it would suggest the start of a potential short-term bottoming process and, hopefully, a subsequent rebound in stocks. We may not have seen full-blown panic, but we have gained some confidence that the upside opportunity for stocks from here may outweigh the downside.

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VALUATIONS

Another way to gauge sentiment is valuations, one of the more common worries about the ongoing bull market. The latest stock market correction has brought stocks down to a reasonable forward (next 12 months) price-to-earnings ratio (PE), below 15, down from more than 17 back in March 2015 (based on Thomson-tracked S&P 500 consensus estimates). On a trailing 12-month basis, at 15.8, valuations are in-line with the average since 1950 and slightly below the post-1980 average.

While valuations alone do not drive our investment decisions, especially in the short term, they can help entice buyers when stocks fall, especially at such low interest rate levels [Figure 3]. In fact, the dividend yield for the S&P 500 at 2.37% as of January 15, 2016, is higher than the yield on 10- year Treasury bonds at 2.03%. Corporate America, outside of the challenged energy sector, remains in very good shape and, we believe, is in good position to grow profits in 2016 despite the drags from the energy sector, a strong U.S. dollar, and slower growth in China.

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WHAT ABOUT FUNDAMENTALS?

Technical analysis and valuations can provide some reassurance that a market decline might be nearing an end, but fundamentals are another key piece of the story. We continue to watch a number of fundamental indicators that might provide early warning of a potentially larger bear market decline. Look for an update on some of our favorite leading fundamental indicators in this publication over the coming weeks.

CONCLUSION

As difficult as it is in periods of heightened volatility, we encourage investors to stick with their plan. The natural emotional response is to sell everything and go to cash, but that is rarely the right decision. Technical analysis tools can help inform our decisions, in addition to valuations and fundamentals. Technical indicators, like valuation and fundamental indicators, are not perfect, but the convergence of extreme bearish signals indicate selling may be near an end.

For more information please see the source link below. 

(Source: LPL Financial)