Market Update: May 30, 2017

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Last Week’s Market Activity

  • S&P 500 Index and the Nasdaq closed at new record highs last Friday; seventh consecutive gain for S&P 500 and 20th record close year to date.
  • The combination of positive sentiment and low volatility suggests stocks may continue to absorb challenging headlines.  Investors weathered potential risks from last week’s news, including: fallout from Comey firing, growing investigation into Administration/Russia ties, White House’s 2018 budget proposal, terrorist bombing in Manchester, Moody’s China debt downgrade, CBO’s score for AHCA, and minutes from last Federal Open Market Committee (FOMC) meeting suggesting higher interest rates ahead.
  • Markets also handled disappointing economic reports, specifically weakness in new home sales, durable goods orders; instead focusing on longer-term trends such as positive global data (Germany, Japan), upward revision to U.S. gross domestic product (GDP) in the 1st quarter.
  • Orders for durable goods fell in April, but good news in the details. Drop (-0.7%) in orders bested expectations (-1.0%) and March revision was strong (details below).
  • Orders ex-transportation showed a similar pattern. Nondefense capital goods shipments ex-air, a proxy for business spending, fell slightly (-0.1%) but better than forecast, following four consecutive monthly gains.
  • For the week, stocks rose +1.5% to +2.0%, powered higher by the unusual combination of utilities and technology sectors, each up >2.0%.  Investors likely hedging their bets, counting on growth prospects of technology, but not necessarily buying into Fed’s rate outlook as “bond proxy” utilities sector rose.
  • Weakness in energy (-2.0%) as markets appeared to have already priced in extension to OPEC production cuts, but investors wanted deeper cuts and pushed WTI crude oil down by >1.5% last week (after rising for three weeks) to ~$49.00/bbl.
  • Action in U.S. Treasury market also points toward less Fed activity after expected June hike, with 10-Year Treasury yield hovering in the 2.25% range, on track for fourth straight monthly gain.
  • U.S. dollar firmed slightly (+0.1%) on the heels of solid GDP revision.
  • Stocks in Europe basically flat Friday; euro & pound sterling weakened as Conservatives’ lead over Labour has narrowed considerably in recent weeks.
    Emerging markets stocks +2.0% on the week, maintaining year to date leadership globally.

Overnight & This Morning

  • Stocks in Asia little changed amid shortage of overseas leads.
  • Yen strengthened for a third day against the U.S. dollar (USD/JPY -0.3% to 110.9)
  • In Europe, shares down fractionally (Euro Stoxx 600 -0.1%); bank stocks, weakness in business & consumer confidence weighing
  • European Central Bank (ECB) Head Draghi was critical of U.S. trade proposals in speech to European Parliament yesterday.  He also reaffirmed commitment to maintaining ECB stimulus, placing pressure on the euro.
  • Euro down -0.1% to $1.11
  • Commodities – Mostly lower, led by weakness in precious metals and agriculture, with WTI oil holding below $50.00/bbl. COMEX gold (-0.2%) to $1265 and copper (-0.6%).
  • U.S. stock, Treasury yields down slightly in muted, post-holiday trading.
  • U.S. dollar weak vs. yen but stronger vs. euro and other major currencies
  • U.S. Personal Income and Spending for April met expectations after two consecutive shortfalls. Inflation metrics in this report are. Its preferred measure of price growth, the Core PCE deflator, key inflation metric for the Federal Reserve, at 1.7% from 1.6%.

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Key Insights

  • The trend for business spending/capital investment is improving.  After years of hoarding cash, paying yield, and buying back shares, the business cycle has returned with upward shifts in pricing and U.S. monetary policy.  Businesses can no longer simply attempt to maintain market share, but rather, they must grow market share as the recovery/expansion enters its ninth year.
  • While personal consumption is still the primary driver of U.S. economic growth, we believe the rate of growth in the coming quarters/years will be driven by capital investment, which is taking up a larger portion of GDP contribution (details below).
  • 1Q earnings per share (EPS) (+15% year over year) faced the easiest comparisons and we look for remainder of 2017 quarterly EPS gains to hover in the mid-high single digit range. These are smaller percentage gains than what we’ve become accustomed to these past couple of quarters, but still indicative of sustained, late cycle growth accompanied by still low interest rates and inflation (details below).
  • We recognize current trading range is of concern. Despite the flattening yield curve, which could partly be the result of global sovereign credit valuations, there appears to be little stress evident in the credit markets (details below).

Fixed Income Notes

  • Despite equity markets at/near record levels, bond market continues to hang in there.  Constant maturity 10-year Treasury note up four consecutive months, Barclays Aggregate (+2.0%) and Barclays High Yield (+4.0%) providing positive returns year to date.
  • After 1.35% low last June, 10-year Treasury yield surged to 2.65% in late February/early March of this year. Since then, several factors have conspired to push yields lower, despite Fed’s plans to raise interest rates (see below). First, failure of the first vote on ACA repeal placed a great deal of uncertainty on likelihood of President Trump’s pro-growth policy agenda being fully enacted. Second, weak Q1 GDP enabled flattening of the yield curve. Third, some are projecting higher short-term borrowing costs will curb lending and growth, making it tougher for Fed to sustain 2.0% inflation target. Fourth (less sinister) reason has to do with relative valuation.  With Fed moving in a different direction from ECB and BOJ, those sovereign bonds trading at very expensive valuations, increasing attractiveness of U.S. government bonds.
  • This can be a blessing and a curse: curse is that a bid for U.S. Treasuries from global investors helps mask our spending profligacy. The blessing is global investors appear confident slow growth with low inflation likely to be sustained in U.S., without signs of excessive upside, or downside risks.
  • As a result, we continue to look for the U.S. benchmark Treasury yield to trade within the 2.25% to 2.75% range in the second half of 2017.
  • Corporate credit spreads (high yield & investment grade) remain narrow, credit default swaps (CDS) also held steady. If these critical market signposts (10-year Treasury yield, credit spreads, CDS) hold steady, financial markets likely to continue narrow trading range
  • Geopolitics may periodically cause near term uncertainty, but like equity markets, next catalyst likely move the bond market will be clarity on U.S. fiscal policy

Macro Notes

  • S&P 500 currently at another record level, 2415, but technicals suggest move to 2450-2475 within reach in coming months.
  • Bullish catalyst is necessary, could come in the form of: sustainable EPS growth, > expected GDP in Q2/Q3, less aggressive Fed in 2H17, corporate tax cuts, tax reform, global GDP etc.
  • Unfortunately, move of this magnitude highly dependent on fiscal policy changes, where uncertainty narrows trading ranges until clarity emerges.
  • Fundamentally, move toward this level can be justified, but anything above it would need more clarity on 2018 EPS increases, largely due to combination of repatriation tax holiday/reduction in corporate tax rate.
  • Assuming $130.00 in S&P 500 operating EPS this year, stocks currently trading ~18.5x calendar 2017; a move >2450 would take market price-to-earnings ratio (P/E) >19x.
  • Tax reform may be too big to achieve in current political environment, but corporate tax cuts still possible; if implemented, 2018 EPS could be >$140.00, which would bring target ranges for index 2500 to 2550 in 12 to 18 months
  • U.S. Q1 Real GDP revised higher from +0.7% to +1.2%, helped by a more positive picture of business investment, which had already posted a strong quarter, and a slightly better picture of consumer spending. The improvement alleviates some concerns of Q1 weakness and increases the likelihood of a Fed rate hike in June. Looking at Q2 GDP, prospects are for much stronger growth, and could be in the +3.0%, as pent up demand in cap-ex, housing, and an inventory rebuild from Q1 weakness propels GDP higher.
  • Though components of the durable goods report (airlines, transportation) can be volatile, the trend over the past year for orders (business investment) is still up approximately +5.0% year over year, despite last month’s weakness
  • A host of European economic data was released overnight, generally showing that the economic recovery continues, but at a somewhat slower pace than expected. The highlighted number was German inflation, running at 1.4%, below forecast and previous readings of 2%, which is also the ECB target rate. This data reduces some pressure on the ECB to alter its current monetary policy.
  • Politics continue to foil plans for European certainty. Just three weeks ago, the election of a Conservative government in the U.K. was seen as both a certainty and a boost for Prime Minister Theresa May. In the past few weeks, a Conservative victory, while still likely according to the polls, is now less certain. The British pound has also weakened, not coincidentally. In addition, there have been renewed calls for an early election, as soon as September 2017, as opposed to the 2018 election now expected. An early election would likely focus directly on the EU and the euro.
  • Corporate Beige Book supports strong earnings outlook. Much like first quarter earnings results and management guidance, our measure of corporate sentiment based on our analysis of earnings conference call transcripts was better than we expected. We saw a sharp increase in strong and positive words over the prior quarter, with no change in weak and negative words. Wwe believe the positive tone from management teams supports a favorable earnings outlook in the quarters ahead.
  • New highs and no volatility, more of the same. The S&P 500 Index closed at another new high on Friday, making it seven consecutive higher closes. It hasn’t been up eight days in a row since July 2013 and the previous two seven day win streaks ended at seven days. It also gained 1.4% for the week, avoiding its first three week losing streak since before Brexit. Last, the incredible lack of volatility continued, as the S&P 500 Index traded in a range of only 0.19% on Friday, the smallest daily range since March 1996 and the smallest daily range while also closing at a new all-time high since August 1991.
  • June is a busy month for central banks. Summer is nearly here and historically that has meant lower volume, but potential market volatility. As we turn the calendar to June, the three big events this month are all from central banks: as the Fed, the ECB, and the BOJ all have meetings to decide interest rate policy. These events, along with a few others, could make for an eventful month in June.

MonitoringWeek_header

Monday

  • Memorial Day Holiday
  • Eurozone: Money Supply (Apr)
  • Japan: Jobless Rate (Apr)

Tuesday

  • PCE (Apr)
  • Conference Board Consumer Confidence (May)
  • France: GDP (Q1)
  • Germany: CPI (May)
  • Eurozone: Consumer Confidence (May)
  • Japan: Industrial Production (Apr)
  • China: Mfg. & Non-Mfg. PMI (May)

Wednesday

  • Chicago Area PMI (May)
  • Beige Book
  • France: CPI (May)
  • Germany: Unemployment Change (May)
  • Eurozone: Unemployment Rate (Apr)
  • Italy: CPI (May)
  • Eurozone: CPI (May)
  • India: GDP (Q1)
  • Canada: GDP (Mar)
  • Japan: Nikkei Japan Mfg. PMI (May)
  • China: Caixin China Mfg. PMI (May)
  • Japan: Capital Spending (Q1)

Thursday

  • ADP Employment (May)
  • Non-Farm Productivity (Q1)
  • Initial Jobless Claims (May 27)
  • Markit Mfg. PMI (May)
  • ISM (May)
  • Eurozone: Markit Eurozone Mfg. PMI (May)
  • Italy: GDP (Q1)
  • Brazil: GDP (Q1)
  • South Korea: GDP (Q1)
  • Canada: Markit Canada Mfg. PMI (May)
  • Japan: Vehicle Sales (May)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (May)
  • Unemployment Rate (May)
  • Trade Balance (Apr)
  • Eurozone: PPI (Apr)

 

 

 

 

 

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 5, 2016

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  • Global stocks shake off Italy vote; oil moves higher. U.S. indexes are moving higher in early trading, boosted by resilience in European equities after Italians voted down the country’s constitutional referendum on Sunday; rising WTI crude oil prices are also lending support. This comes after the S&P 500 failed to hold early gains in Friday’s session, as strength in defensive stocks was not enough to overcome weakness in the heavily weighted financials and consumer discretionary sectors. Overseas, Asian markets finished mostly lower; the Shanghai Composite (-1.2%) and the Hang Seng (-0.2%) both declined, whereas Japan’s Nikkei (-0.8%) took a breather after reaching 11-month highs last week. Stocks in Europe recovered from early selling pressure following Sunday’s vote in Italy; the STOXX 600 is up 0.4% mid-afternoon. Elsewhere, oil ($51.88/barrel) is tracking near 12-month highs on optimism around last week’s Organization of the Petroleum Exporting Countries (OPEC) deal, COMEX gold ($1163/oz.) is off 1.24%, and Treasuries are falling as the yield on the 10-year note trades at 2.44%.

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  • Quiet week ahead for data as investors mull election results in Europe. As is typically the case in the week after the release of the U.S. monthly jobs report, released last Friday, December 2, 2016, this week’s U.S. economic calendar is relatively quiet, with today’s key release being the service sector Institute for Supply Management (ISM) reading for November. After a flurry of Federal Reserve Bank (Fed) speakers today, December 5, the unofficial “quiet period” for the Fed begins, ahead of the December 13-14, 2016 Federal Open Market Committee (FOMC) meeting. Overseas, China will begin to report its November data set this week, and the central banks of Canada, Australia, and India all meet. With the Italian referendum and the Austrian election in the rear-view mirror, the key event in Europe this week is the European Central Bank‘s policy meeting on Thursday, December 8.
  • European equity markets, and the euro itself, are positive after yesterday’s voting. As widely expected, the Italian people voted against a referendum that would restructure how the country’s Senate would be elected, leading to the resignation of Prime Minister Matteo Renzi. His resignation opens the door for the anti-European Five Star party to gain political strength, and perhaps even lead the next Italian government. Although this is potentially destabilizing, the markets had well priced in the outcome of this vote. At the same time, Austrian voters rejected an anti-European candidate from the far right as their president. Though the presidency in Austria is relatively weak, the election of a far-right candidate would have been seen as another threat to European political integration and the euro itself. This positive surprise has helped the markets (outside of Italian stocks) remain buoyant.
  • Beige Book recap. The themes in the November 2016 Beige Book are consistent with our view that the Fed will raise rates later this month. At +64, the November Beige Book 2016 reading is now back in the middle of the range it has been in since early 2012. Despite the elevated level of uncertainty surrounding the U.S. presidential election and the outlook for the global economy, optimism on Main Street still reigns.
  • Irrational Exuberance Part 2? Twenty years ago today, Fed President Alan Greenspan gave his now famous Irrational Exuberance speech regarding over-valuations in the equity markets. Today, we examine if we are in another state of irrational exuberance. One concern is valuations are indeed higher than historical norms, although they are by no means near the euphoric levels of the late 1990s. On the fundamental front, the economy continues to show growth consistent with mid cycle, not late cycle. Last, overall market sentiment is showing many more bulls than we saw a month ago, but it still isn’t near the levels of excitement seen at previous market peaks.
  • Santa tends to come late. We all know that December is historically a strong month or equities, with the S&P 500 up 1.6% on average since 1950[1]. Here’s the catch: nearly all the gains tend to happen the second half of the month. Since 1950 on average, the S&P 500 has been flat as of December 15, rallying strongly during the second half of the month. The past 20 years, the S&P 500 has actually been down 0.4% as of mid month, before finishing 1.3% higher on average.

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

MonitoringWeek_header

Monday

  • ISM Non Mfg. (Nov)
  • Dudley (Dove)
  • Evans (Dove)
  • Bullard (Hawk)

Tuesday

  • FOMC Quiet Period Begins

Wednesday

  • India: Reserve Bank of India Meeting (No Change Expected)
  • China: Imports and Exports (Nov)

Thursday

  • Flow of Funds (Q3)
  • Eurozone: European Central Bank Meeting (No Change Expected)
  • China: CPI (Nov)
  • Japan: Economy Watchers Survey (Nov)

Friday

  • Consumer Sentiment and Inflation Expectations (Dec)

 

 

 

 

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.

Weekly Advisor Analysis: February 23, 2016

Last week’s positive performance across global markets gave investors a chance to catch their breath and retest the waters. U.S. stocks were up with the S&P 500 notching a 2.85 percent gain and the Dow Jones Industrial Average up 2.61 percent. The tech-heavy NASDAQ Composite Index was up just over 3.87 percent. European stocks were also up, posting a positive 1.87 percent as measured by the Stoxx Euro 600 Index. Japanese equities gained 6.8 percent after the Nikkei 225 Index rebounded from heavy selling the week before.

Domestic Equities

U.S. equities posted their first three-day rally of the year and the biggest three-day gain last week since August 2015. While all sectors were up, the energy and financial sectors are still down year-to-date as oil and stubbornly low interest rates continue to weigh on those areas of the market. In fact, the energy and financial sectors are down 6.21 percent and 10.65 percent for 2016, respectively. As the chart below highlights, only the utilities and consumer staples sectors are holding onto positive territory with consumer staples only just so. Will 2016 be another year where a small group of stocks or sectors drive the market’s performance? No one knows for sure but we continue to believe that active management, with a focus on being selective while leveraging secular trends, is still the most prudent way to manage an equity portfolio.

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Federal Reserve Minutes

The Federal Reserve released the minutes from its most recent meeting last Wednesday allowing investors a glimpse into how one of the world’s most powerful central banks views the economy and global markets. While investors already knew the outcome of the meeting, being able to see details on how the Federal Reserve came to the decision not to raise rates is what markets were focused on last week. More specifically, the Federal Reserve minutes showed officials were struggling to agree on their outlook for inflation and how risks to the economy may materialize. What appeared to drive markets upward was the fact the Federal Reserve gave few clues as to when they will raise rates again indicating rates will likely remain lower for longer. The next meeting for the Fed is March 15-16 and, given their comments from the January meeting, an interest rate increase at that meeting seems more unlikely than ever. As we said in our 2016 outlook, we continue to believe the Federal Reserve’s initial target of 1.25-1.50 percent by year-end would be difficult to achieve.

Oil

Oil prices were whipsawed this past week as news of a potential production cut pushed prices higher while larger inventory stockpiles weighed on the commodity. Russia, Saudi Arabia, Qatar, and Venezuela met earlier last week and indicated they will cap their output if Iran and Iraq did so as well. While both Iran and Iraq have not confirmed whether they will participate, it is newsworthy that Russia has joined the chorus of those countries seeking to limit production. Russia had previously refused to consider such action. It’s no wonder oil-rich countries are beginning to take these measures. While energy companies must delay investment and lay off workers, countries that largely depend on oil revenue are reeling from the low prices. In fact, Saudi Arabia had a record deficit of almost $98 billion in 2015 and Standard & Poor’s just reduced the country’s credit rating from A+ to A-, citing the long-lasting impact of low oil prices on the economy. In all likelihood, oil volatility will remain elevated as investors await the impact of the agreement on future inventory levels as well as any changes in global demand.

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Fun Story of the Week

It’s easy to think we know almost everything about our planet. Other than the deepest oceans, humans have explored nearly every square mile of every continent and, with the use of satellite photography, this becomes all the easier. Despite this, we still discover amazing natural wonders not previously known to science. In many cases, these are the subject of rumor or shrouded in mystery and distorted over the years as they are passed down through generations. Some of these tall tales turn out to be just that, nothing but fiction used to tell a story. However, there are some that turn out to be true. Up until recently, there was a rumor of a river deep in the Peruvian rainforest that is so hot it can literally boil. Adding to the mystery were cryptic references to the river in old petroleum survey reports dating back to the 1930s. It wasn’t until geoscientists decided to pursue those legends and journey deep into the rainforest to see it with their own eyes. What they discovered was the Mayantuyacu, a natural, 4-mile geothermal stretch of a river that is indeed over 200 degrees Fahrenheit. This is exceptionally amazing in that it would require incredible amounts of heat to boil the river’s flowing water. While there are documented hot springs throughout the Amazon, none are nearly as big as the Mayantuyacu or as far away from the nearest volcano. In fact, the river lays hundreds of miles away from the closest active South American volcano, making it truly a natural wonder.

Weekly Advisor Analysis: February 1, 2016

Last week was a busy week in terms of data releases and news. Estimated U.S. gross domestic product (GDP), unemployment data, and the Federal Reserve were just a few headlines that grabbed investors’ attention. U.S. indexes enjoyed another week in the black as domestic indexes surged on Friday. The S&P 500 was up 3.2 percent while the Dow Jones Industrial Average and the NASDAQ were up 3 percent and 2.8 percent, respectively. Internationally, the picture was quite different. The Euro Stoxx 600 index was up 3.77 percent but Chinese equities, as measured by the Shanghai Composite Index, were down 5.63 percent.

Unemployment Figures

The job market continues to look strong here in the United States. The most recent release by the Labor Department indicated initial jobless claims fell 16,000 to 278,000. Economists surveyed by The Wall Street Journal were expecting 280,000 claims. Economists pay close attention to the initial jobless claims because, if they are falling, it frequently means less companies are laying employees off and more are hiring. This is typically good for wages which can lead to more consumer spending and domestic growth. More generally, unemployment numbers usually fall during the fourth quarter of the year as temporary hiring picks up for the holidays. The number then tends to rise in the first quarter of the following year as those temporary jobs are no longer needed.

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U.S. GDP

GDP slowed in the last quarter of 2015. Economists were expecting 0.8 percent growth but the first estimate of fourth quarter GDP was 0.7 percent. GDP results typically go through a number of revisions as the preliminary estimate includes incomplete data. The final figure can be meaningfully different than the first estimate. According to the results, business inventory investment, personal consumption, and trade were the main detractors. The drop-in trade is likely due to the stronger U.S. dollar and uninspiring global growth while the lagging inventory investment and slowing personal consumption could indicate a decelerating domestic economy. On the positive side, residential investment jumped 8.1 percent in the fourth quarter and, by some measures, the housing market in 2015 was the most robust since the recession.

Fun Story of the Week

A team of physicists appear to have cracked a significant roadblock in quantum computing, paving the way for quantum computers that can solve “insolvable” problems. If the physicists are correct, then they have solved the causality problem by using quantum particles that are moving along “open timelike curves.” Theoretically, quantum computers using “closed timelike curves” create causality problems. A more practical (or relatable) example of a causality problem takes place in the Back to the Future movie. Since Michael J. Fox’s Marty McFly went back in time and tampered with the past, he almost caused a new future in which he didn’t exist. The same type of problem happens at the particle level, too. With the “open timelike curves,” the physicists hypothesize, as long as they entangle the time-traveling particles with one in the present, they won’t interact with anything in the past, thus preventing causality problems. Think of this as Marty McFly going back in time, still tied to his present-day “self,” and being able to use that information, but not being allowed to speak with his teenage mother and father or interact with anyone else during his trip. According to their report, while these particles never interact, the nature of quantum mechanics and computing still allows for the solving of impossible calculations. Confused? So am I.

Fourth Quarter, a Look Back…

ECB Announces Monthly Rate Decision
Photographer: Hannelore Foerster/Bloomberg

The Federal Reserve pulled the trigger. At the December Federal Open Market Committee meeting, the Fed finally acted, tightening monetary policy by raising the funds rate from 0.25 percent to 0.50 percent. It’s important to remember the Fed doesn’t actually set interest rates. It takes actions designed to influence financial behaviors. The Fed has given rates a push, it remains to be seen whether its efforts will bear fruit.

The European Central Bank (ECB) acted, too. Although, its monetary policy moved in a different direction, offering additional stimulus measures to support European economies. Investors were enthusiastic when the ECB announced its intentions; however, markets were underwhelmed when the economic measures delivered were less stimulative than many had expected.

China’s currency gained status. The International Monetary Fund decided to add the Chinese yuan (a.k.a. the renminbi) to its Special Drawing Rights basket, effective October 1, 2016. After the renminbi is added, the U.S. dollar will comprise 42 percent of the basket, the euro will be 31 percent, the renminbi will be 11 percent, the Japanese yen will be 8 percent, and the British pound will also be 8 percent.

Congress tweaked Social Security. The Bipartisan Budget Act of 2015 (BBA) averted a U.S. default and deferred further discussion of U.S. debt and spending levels until after 2016’s presidential and congressional elections. It also did away with two popular social security claiming strategies. The restricted application strategy was discontinued at the end of 2015, and file and suspend strategies will be unavailable after May 1, 2016.

Medicare premiums go up, but not for everyone. The BBA also limited increases in Medicare premiums. About 14 percent of Medicare beneficiaries will pay higher premiums in 2016. The new premium will be $121.80, up from $104.90 in 2015. Original proposals suggested the premium amount increase to $159.30.

Weekly Market Commentary: November 3, 2015

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You have to really hunt to find red in October. October 2015 was a great month for stocks, as the S&P 500 Index rose 8.3% to help take the index from a year- to-date loss of over 9% on August 25, 2015, to a 1% gain as of Friday, October 30, 2015. Only 13 months since 1980 have been better, including only 3 Octobers [Figure 1]. The old market adage that October is the month where bear markets go to die held true. But the strong month raises the bar for markets to add to gains over the rest of the year, as higher stock prices have brought higher valuations. It is interesting to note that nearly all of these strong months came during the early or middle parts of bull markets, with March 2000 being the one notable exception. We look ahead at the calendar to identify catalysts that could potentially help stocks add to recent gains.

QUITE A MONTH

We believe October’s gains were driven primarily by two factors: the market’s increased comfort with China and market-friendly central bank actions. A relatively good start to earnings season and the budget deal in Washington to stave off a nasty debt ceiling debate also helped buoy sentiment.

China’s economy is likely growing more slowly than the official gross domestic product (GDP) statistics, although the reliable Chinese data we have suggest growth is stabilizing. The sixth interest rate cut in the past year by the People’s Bank of China (China’s central bank) and other stimulus initiatives have added to the market’s confidence that China would avoid a hard landing (see our latest Thought Leadership piece on China).

Central bank activities in the U.S. and Europe also helped drive stocks higher in October. In the U.S. for much of October, stocks benefited from the pushout of market expectations for Federal Reserve (Fed) rate hikes into early 2016. Stocks held their monthly gains after the Fed removed the portion of its policy statement about overseas growth concerns, even though the odds of a December rate hike increased (based on fed fund futures). Optimism about more stimulus from the European Central Bank (ECB) also helped boost U.S. stocks in late October.

Just because October was a big month does not necessarily mean that stocks will pull back between now and the end of the year. Since 1980, the S&P 500 has been up an average of 1.2% with gains 50% of the time in the two months following a calendar month gain of over 8%. That small potential gain, coupled with dividends, could potentially get the S&P 500 to the low end of our 5–9% total return forecast for 2015.

CATALYST CALENDAR

There are some potential events on the calendar that may be key determining factors of whether stocks can add to 2015 gains over the next
two months.

Federal Open Market Committee (FOMC) meeting (December 15–16)

We see this date as a potential catalyst because of the strong performance record stocks have historically

experienced after the Fed begins to hike rates.* The market may like getting the first hike out of the way, especially considering the implied positive growth message. That said, we recognize that the first Fed rate hike of an economic cycle has driven stock market volatility in the past (though usually short lived), so this date is a risk as much as a potential catalyst.

Also worth noting, Fed Chair Janet Yellen will speak on November 4, 2015, before the Financial Services Committee of the U.S. House of Representatives, and before the Economic Club of Washington on December 2, 2015. Fed Vice Chair Stanley Fischer will speak to the Economic Club of Washington on November 4, 2015. These events may provide insights into the path of future Fed policy and could act as secondary catalysts.

Job reports (November 6, December 4)

We believe the Fed is still very much on the fence about whether to hike rates in December or to wait until early 2016.

The two jobs reports will go a long way toward determining whether the Fed hikes rates at its next meeting in December. Recall the September jobs report was soft, with just 142,000 net new jobs created for the month (below the 2015 trend of around 200,000), although the unemployment rate held steady at 5.1%.

OPEC meeting (December 4)

OPEC will hold its biannual meeting on December 4. Oil has become more important for financial markets, as the drop in oil prices has significantly impacted overall corporate profits, capital spending, emerging market economies, and credit markets. While the status quo is the most likely scenario, it is possible that stocks may get some help from a reduction in OPEC’s production target and a subsequent bump up in oil. Saudi Arabia is in control and seems intent on preserving market share, but could try to talk up prices to help the smaller players without meaningfully altering its own production.

Holiday retail sales (December 11)

The government’s retail sales date for November, to be released on December 11, include the first month of the all-important holiday shopping season. For many retailers and tech gadget makers, more than half of their sales for the year come during the peak holiday shopping season (November and December). The consumer has been the key driver of U.S. economic growth—consumer spending rose at a 3.2% annualized pace during the third quarter, compared to overall GDP growth of just 1.5%. Based on recent sales trends and strong consumer balance sheets, we expect holiday shopping sales totals to grow roughly in-line with the National Retail Federation’s forecast of 3.7% in 2015. Holiday shopping may not be a big potential positive catalyst, but we do not expect it to be a drag either.

Weekly Market Commentary: October 27, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Central banks were at it again – and markets loved it.

Last week, European Central Bank (ECB) President Mario Draghi surprised markets when he indicated the ECB’s governing council was considering cutting interest rates and engaging in another round of quantitative easing. The Economist explained European monetary policy was heavily tilted toward growth before the announcement:

“The ECB is already delivering a hefty stimulus to the Euro area, following decisions taken between June 2014 and early 2015. It has introduced a negative interest rate, of minus 0.2%, which is charged on deposits left by banks with the ECB. It has also been providing ultra-cheap, long-term funding to banks provided that they improve their lending record to the private sector. And, most important of all, in January it announced a full-blooded program of quantitative easing (QE) – creating money to buy financial assets – which got under way in March with purchases of €60 billion ($68 billion) of mainly public debt each month until at least September 2016.”

Despite these hefty measures, recovery in the Euro area has been anemic, and deflation remains a significant issue. According to Draghi, Euro area QE is expected to continue until there is “a sustained adjustment in the path of inflation.” Europe is shooting for 2 percent inflation, just like the United States.

The People’s Bank of China (PBOC) eased monetary policy last week, too. On Monday, data showed the Chinese economy grew by 6.9 percent during the third quarter, year-over-year. Projections for future growth remain muted, according to BloombergBusiness. On Friday, the PBOC indicated it was cutting interest rates for the sixth time in 12 months.

U.S. markets thrilled to the news. The Dow Jones Industrial Average, Standard & Poor’s 500 Index, and NASDAQ were all up more than 2 percent for the week. Many global markets delivered positive returns for the week, as well.

Data as of 10/23/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 2.1% 0.8% 6.4% 13.7% 11.9% 5.6%
Dow Jones Global ex-U.S. 0.6 -2.5 -3.3 3.2 0.4 2.0
10-year Treasury Note (Yield Only) 2.1 NA 2.3 1.8 2.6 4.5
Gold (per ounce) -1.7 -3.2 -5.8 -12.1 -2.8 9.6
Bloomberg Commodity Index -2.6 -16.2 -25.4 -15.4 -9.8 -6.4
DJ Equity All REIT Total Return Index 1.2 2.4 8.1 11.6 11.7 7.9

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Weekly Advisor Analysis: October 27, 2015

Central Banks coaxed the equity markets higher yet again this week. Hints of more easing from the European Central Bank (ECB) and a surprise rate cut by the Bank of China pushed stocks higher in the back half of the week. It also didn’t hurt that earnings reports from large technology companies beat expectations. The S&P 500 finished last week 2.1 percent higher, its fourth consecutive weekly gain. The Dow Jones Industrial Average rose 2.5 percent, and the technology heavy NASDAQ Composite jumped 3 percent.

Central Banks to the Rescue Again

A pair of central banks boosted equity markets this past week. First, the ECB President, Mario Draghi, hinted that more stimulus could be coming when that central bank reexamines its current policy in December. The ECB is currently purchasing 60 billion euros worth of bonds each month. This sent European equity markets to their highest point since August and pushed yields on the German ten-year note below 50 basis points. The euro also sank nearly 2 percent to $1.11 on the news. Then, on Friday the Central Bank of China announced a quarter-point cut in its benchmark interest rate as well as a 50 basis point reduction in reserve requirement ratios for banks. This was the sixth time since November 2014 that the Chinese central bank cut interest rates.

Existing Home Sales Surge

The National Association of Realtors recently announced existing home sales rose 4.7 percent for the month of September to an annual rate of 5.5 million. The September figure puts us on pace for the best year for existing home sales since the housing crisis. The increased activity appears to be driven by job growth, low rates, and pent-up demand given years of low new household formations. However, the robust report did show some cracks. Primarily, the reduction in the percentage of first-time home buyers. First-time buyers represented just 29 percent of purchases in the month, down from 32 percent in August. A reduction in this source of new demand could foreshadow a slowdown in the coming months. This is largely the result of home prices rising faster than incomes. The median home price for September rose more than 6 percent year-over-year, compared to just 2 percent income growth.

http://www.wsj.com/articles/u-s-sales-of-existing-homes-surge-in-september-1445522932?alg=y
http://www.wsj.com/articles/u-s-sales-of-existing-homes-surge-in-september-1445522932?alg=y

Gas Drops to Six-Year Low

Gasoline futures have dipped 10 percent so far in October capping off a collapse to a six-year low. The decline stems from further increases in supply. According to the Energy Information Administration, gasoline inventories stood at 221 million barrels at the end of the first week of October. This is the highest level for this time of year since 1990. On top of the increased supply is the seasonal effect where refineries begin ramping production of heating oil, which produces gasoline as a byproduct. This is causing some forecasters to call for gasoline prices to fall below $2 per gallon this winter. However, domestic demand is expected to remain strong, which may keep prices elevated. The United States now uses more than nine million barrels of gasoline a day, the highest level for this time of year since 2009.

http://www.wsj.com/articles/oil-prices-begin-down-as-china-data-spooks-investors-1445246756
http://www.wsj.com/articles/oil-prices-begin-down-as-china-data-spooks-investors-1445246756

Fun Story of the Week

For most people, completing a marathon is, in and of itself, a major accomplishment. However, Steve Bergstrom went above and beyond during this year’s Chicago marathon by finishing in less than four hours and receiving twelve date requests in the process. The recently-single marketing professional decided to run the marathon shirtless with a simple message, written with a marker, onto his back: SINGLE/on Facebook/Steve Bergstrom. The runner thought he would have a better time finding a suitable mate during the marathon since he spends hours a week training. Even in a world of social media and online banner ads, some of the best marketing can still be done with a little creativity and pen.

Global Wealth Shrinks for the First Time Since Lehman

© Provided by CNBC

Sharp swings in the currency markets have taken their toll on overall global wealth, shrinking it for the first time since the global financial crisis.

But while the overall pool of cash has declined, the gap between rich and poor has widened, with the top 1 percent of global wealth holders now in possession of 50 percent of all household assets in the world, according to the annual Credit Suisse global wealth report.

Total wealth has doubled since 2000, with a fivefold rise in China and lower, but still rapid, growth in India according to the research.

“Wealth inequality changes slowly over time, so it is difficult to identify the drivers of these trends. However, the value of financial assets – especially company securities – is likely to be an important factor because wealthier individuals hold a disproportionate share of their assets in financial form,” the report found.

Total global wealth decreased by $12.4 trillion to $250.1 trillion, with the strength of the U.S. dollar weighing on the overall global wealth picture, as when valued in U.S. dollars, net worth fell in every region except China and North America.

The decline is the first time global household wealth has fallen since the economic crisis of 2007-2008, but when stripping out currency headwinds the underlying trend points to net worth growing every year this century, apart from the financial crisis period, the report found.

This dip in overall wealth also hit the number of millionaires, which having climbed from 13.7 million at the turn of the century to 36.1 million in 2014, fell back this year to 33.7 million due to exchange rate effects.

“The rise of 146 percent (in millionaires) since 2000 reflects population growth and the fact that inflation progressively lowers the bar for membership of the millionaire club. Nevertheless, the number of millionaires has still grown significantly after discounting for these factors,” the report authors said.

The U.S. tops the list of countries with wealth rises again, with an increase of $4.6 trillion, falling way short of the $9 billion gained the year before but “substantial” in the global context, according to Credit Suisse.

Wealth also increased in China by a significant $1.5 trillion and in the U.K. by $360 billion. No other country gained more than $100 billion while wealth fell by $100 billion or more in 27 countries and in excess of $500 billion in nine countries.

Some of these bigger fallers, including France, Germany, Italy and Spain – were euro zone countries which exchange rate fluctuations had worked in their favor a year ago.

Australia and Canada also shed more than $1.5 trillion between them and wealth fell substantially again in Japan, this time by $3.5 trillion.

Written by Jenny Cosgrove of CNBC

(Source: CNBC)

Weekly Market Commentary: October 5, 2015

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Well, third quarter was a humdinger.

It began with the first International Monetary Fund (IMF) default by a developed country (Greece) and finished with Hurricane Joaquin possibly headed toward the east coast. In between, China’s stock market tumbled, the Federal Reserve tried to interpret conflicting signals, and trade growth slowed globally.

After such a stressful quarter, we may see an uptick in the quantity of alcoholic beverages consumed per person around the world. That number had declined (along with economic growth in China) between 2012 and 2014, according to The Economist.

No Grexit – for now

Despite defaulting on its IMF loan, rejecting a multi-billion-euro bailout plan, and closing its banks for more than two weeks, Greece was not forced out of the Eurozone. Instead, Europe cooked up a deal that left the IMF unhappy and analysts shaking their heads.

The Economist reported the new deal for Greece was an exercise in wishful thinking. The problem is the deal relies on “the same old recipe of austerity and implausible assumptions. The IMF is supposed to be financing part of the bailout. Even it thinks the deal makes no sense.” It’s a recipe we’re familiar with in the United States: When in doubt, defer the problem to the future.

A downturn in China

Despite reports from the Chinese government that it hit its economic growth target (7 percent) on the nose during the first two quarters of the year, The Economist was skeptical about the veracity of those claims. During the first quarter:

“Growth in industrial production was the weakest since the depths of the financial crisis; the property market, a pillar of the economy, crumbled. China reported real growth (i.e., after accounting for inflation) of 7 percent year-on-year in the first quarter, but nominal growth of just 5.8 percent.”

That statistical sleight of hand implies China experienced deflation early in the year. It did not.

On a related note, from mid-June through the end of the third quarter, the Shenzhen Stock Exchange Composite Index fell from 3,140 to about 1,716, according to BloombergBusiness. That’s about a 45 percent decline in value.

Red light, green light at the Federal Reserve

Green light: employment numbers. Red light: consumer prices, inflation expectations, wages, and global growth. Late in the quarter, the Federal Reserve decided not to begin tightening monetary policy. According to Reuters, voting members of the Federal Open Market Committee (FOMC) decided uncertainty in global markets had the potential to negatively affect domestic economic strength.

They may have been right. The Wall Street Journal reported, although unemployment remained at 5.1 percent, just 142,000 jobs were added in September. That was significantly below economists’ expectations that 200,000 jobs would be created. The Journal suggested the labor market has downshifted after 18 months of solid jobs creation.

Global trade in the doldrums

The global economy isn’t as robust as many expected it to be. According to the Business Standard, the World Trade Organization (WTO) lowered its forecast for global trade growth during 2015 from 3.3 percent to 2.8 percent. Falling demand for imports in developing nations and low commodity prices are translating into less global trade. Expectations are trade growth will be 3.9 percent in 2016, which could help support global economic growth.

Data as of 10/2/15 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.0% -5.2% 0.3% 10.5% 11.4% 4.8%
Dow Jones Global ex-U.S. 0.7 -8.6 -10.3 0.8 0.0 0.9
10-year Treasury Note (Yield Only) 2.0 NA 2.4 1.6 2.5 4.4
Gold (per ounce) -0.5 -4.9 -5.9 -13.7 -2.8 9.4
Bloomberg Commodity Index -0.7 -15.8 -25.7 -16.1 -8.7 -6.9
DJ Equity All REIT Total Return Index 1.5 -3.3 9.2 9.4 11.6 6.8

S&P 500, Dow Jones Global ex-US, Gold, Bloomberg Commodity Index returns exclude reinvested dividends (gold does not pay a dividend) and the three-, five-, and 10-year returns are annualized; the DJ Equity All REIT Total Return Index does include reinvested dividends and the three-, five-, and 10-year returns are annualized; and the 10-year Treasury Note is simply the yield at the close of the day on each of the historical time periods.

Sources: Yahoo! Finance, Barron’s, djindexes.com, London Bullion Market Association.