Market Update: February 13, 2017

© Spencer Platt/Getty Images

MarketUpdate_header

  • U.S. indexes aim for fresh record highs on global strength. Domestic markets look to add to last week’s gains after the S&P 500 rose 0.4% Friday with all but one sector finishing in the green; materials (+0.9%), energy (+0.8%), and industrials (+0.8%) led the way while consumer staples (-0.1%) lost ground. Overseas, stocks in Asia began the week higher as traders evaluated Japanese GDP data and a generally positive outcome of the U.S.-Japan summit over the weekend; the Shanghai Composite (+0.6%) and Hang Seng (+0.6%) led major indexes in the region, while the Nikkei gained 0.4%. European markets are also moving up as the STOXX 600 is heading for its fifth consecutive gain. Elsewhere, the dollar touched a two-week high, WTI crude oil ($53.07/barrel) is pulling back after three days of gains, COMEX gold ($1227/oz.) is modestly lower, and the yield on 10-year Treasuries is up 3 basis points (0.03%) to 2.44%.

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  • Earnings update: strong growth, decent upside. With 71% of S&P 500 companies having reported, S&P 500 earnings are tracking to an 8.4% year-over-year increase, 2.3% above estimates on January 1, 2017 (Thomson Reuters data). Financials, materials, and technology have produced the most upside (all 3% or more) and financials the most growth (+20.8%), followed by technology at 10.9%. An earnings gain for all 11 S&P sectors remains possible with no sector down more than 1.5%. Revenue growth ticked up to 4.4%, led by consumer discretionary, healthcare and technology. This week is another busy one with 55 S&P 500 companies slated to report results.

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  • Supportive guidance. S&P 500 earnings estimates for 2017 are down by a below-average 1.1% since earnings season began (the average decline is 2.5%). Industrials, financials and energy estimates have held up best, with energy actually seeing estimates rise. We continue to expect mid- to high-single-digit earnings growth for the S&P 500 overall in 2017, and have seen nothing from corporate America during earnings season that would cause us to lose confidence in that forecast. The possibility exists that this forecast might prove too low given the potential for a policy boost later this year
  • Real estate by cycles. Evaluating real estate investments depends on three cycles: the economic cycle, the building cycle, and the interest rate cycle. We believe we are in a good spot in the economic cycle for attractive real estate returns, with steady job gains and an improving domestic economic growth outlook. The building cycle for real estate shows little sign of the type of overbuilding that has ended previous cycles. Finally, although we expect interest rates to rise, we expect increases to be modest and driven by improving economic growth and a gradual pickup in inflation, conditions historically favorable for real estate. Based on these metrics, our real estate outlook, including REITs, is favorable while a spike in interest rates remains a key risk.
  • Japan releases Q4 and 2016 gross domestic product (GDP) data overnight. The results were modestly disappointing as Q4 growth was 0.2% vs. an estimated 0.3%; for calendar year 2016, GDP growth was 1.0%, vs. consensus expectations of 1.1%. More telling than the narrow miss itself is the source of Japanese growth: mostly exports. Domestic consumption was flat for Q4 and represented about one half of the total economic growth in 2016. This may encourage Japanese authorities to weaken the yen further, though doing so may ire the Trump administration, which had previously labeled Japan’s trade surplus as unfair. Japanese stocks were stronger overnight, while the yen weakened 0.4%.
  • Busy calendar this week includes Yellen testimony. Fed Chair Yellen’s semiannual monetary policy testimony to Congress highlights this week’s very busy economic and event calendar. In addition to Yellen, a half dozen other Fed officials are on the docket as markets gauge whether or not the Fed will raise rates at its March 2017 meeting. The data due out this week on January CPI, retail sales, leading indicators, housing starts and industrial production, along with February reports on Empire State and Philadelphia Fed manufacturing and housing market sentiment, will weigh on the Fed’s decision. Overseas, Q4 GDP reports are due out in the Eurozone, Poland, and Malaysia, along with the always timely ZEW report (February) in Germany. There are no major central bank meetings this week.
  • Happy Anniversary. The S&P 500 hit last year’s low on February 11 and has since gained more than 26%. Over the past year we’ve seen a massive global stock market rally, with financials, energy, and materials leading in the U.S. A year ago there were calls to “sell everything” and many high-profile cuts of year-end equity targets.

MonitoringWeek_header

Sunday

  • Japan: GDP (Q4)

Monday

  • China: CPI (Jan)

Tuesday

  • NFIB Small Business Optimism Index (Jan)
  • Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-Senate
  • Kaplan (Hawk*)
  • Eurozone: GDP (Q4)
  • Germany: ZEW (Feb)

Wednesday

  • CPI (Jan)
  • Retail Sales (Jan)
  • NAHB Housing Market Index (Feb)
  • Fed Chair Yellen’s Semiannual Monetary Policy Testimony to Congress-House

Thursday

  • Housing Starts (Jan)
  • Philadelphia Fed Mfg. Report (Feb)
  • G-20 Foreign Ministers meeting
  • Eurozonee: Account of the 01/19/17 European Central Bank meeting released

Friday

  • Leading Indicators (Jan)

 

 

 

 

 

 

 

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: January 3, 2017

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MarketUpdate_header

  • Oil spike, China data boost stocks. Major U.S. indexes are moving higher to start the new year, fueled by a rise in oil as the commodity hit fresh 18-month highs earlier today with a supply cut among major producers coming into effect. Looking back, the S&P 500 closed out 2016 with a 12.0% total return, even as it fell 0.5% on Friday; financials was the only sector to rise on the last trading day of the year, clawing out a 0.2% gain on the heels of strength in the Treasury market. Technology (-1.0%) and consumer discretionary (-0.9%) were Friday’s worst performers. Overnight, upbeat manufacturing data out of China gave both the Shanghai Composite (+1.0%) and the Hang Seng (+0.7%) a boost; Japan’s Nikkei was closed for a holiday. European shares are also broadly higher in afternoon trading, particularly mining and energy stocks, which are benefiting from the news out of China. Meanwhile, COMEX gold ($1155/oz.) is modestly higher, WTI crude oil ($54.12/barrel) is up 0.7%, and the yield on the 10-year Treasury note is at 2.47%.

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  • A volatile year results in little change for Treasury yields. It was a volatile year for Treasury yields, with the 10-year yield closing as low as 1.36% in July and as high as 2.60% in December, but for all the volatility, yields didn’t move much for the full year. In the final week of 2016, the 10-year yield moved lower to close out the year at 2.45%, just 15 basis points (0.15%) higher than its closing yield of 2.30% on 12/31/15. The 30-year Treasury, which also traded within a wide range during the year closed the year out at 3.08%, an even slimmer 5 basis points (0.05%) above its 12/31/15 closing yield of 3.03%.
  • Similar story for yield curve. Yield curve steepness, as measured by the difference between the 10-year and 2-year Treasury yields, also closed near year-end 2015 levels, following a similar trend as the Treasury yields that it is based on. The curve spent much of the first half of the year flattening, before reversing later in the year. Improving economic and inflation expectations post-election helped steepen the curve in November, before it moved slightly lower toward year-end, closing at 1.24%, just 0.03% higher than year-end 2015 levels. A steepening yield curve means that long-term yields are moving higher relative to short-term yields, indicating improving expectations for economic growth and/or higher inflation.
  • Inflation expectations higher for year. One thing that did move higher during 2016 was inflation expectations. Implied expectations, as measured by the difference between the 10-year Treasury and 10-year Treasury Inflation-Protected Security (TIPS) yields, closed the year at 1.94%, still below the Federal Reserve Bank’s (Fed) 2% target, but much improved from lows of 1.2% reached in February.
  • Outflows continue to be a headwind for municipals. Municipal bonds, as measured by the Bloomberg Barclays Municipal Bond Index, managed a positive return of 0.38% last week, though they saw another week of underperformance versus Treasuries (0.55% for Bloomberg Barclays US Aggregate Government–Treasury Index). Municipal bond fund outflows continued to be a headwind for the sector, with $4.5 billion leaving the asset class for the week ending 12/21/16. January has historically been a time of seasonal strength for the municipal market, as lowered supply and reinvestment demand combine to improve the market’s supply/demand balance, though it remains to be seen if fund outflows will derail the trend this year.
  • 2017 gets off to a quick start this week. Data include key December reports on Institute for Supply Management (ISM) (both manufacturing and non-manufacturing) Purchasing Managers Indexes, vehicle sales, ADP employment, layoff announcements, and of course the December employment reprt, owhich is due out on Friday, January 6. Four Fed speakers are on the docket this week, including 2017 Federal Open Market Committee (FOMC) voter Charles Evans (Chicago), and the Fed will release the minutes of its December 13-14 FOMC meeting tomorrow, Wednesday, January 4.
  • Earnings outlook remains bright. Earnings estimates for the S&P 500 in 2017-up 12% over 2016 based on analysts’ consensus estimates-have inched marginally higher over the past month to near $133 per share, while estimates for soon-to-be-reported fourth quarter 2016 earnings growth, at +6%, have held firm. We believe our forecast for mid-to-high single digit earnings growth in 2017 is achievable based on the potential for higher economic growth, stable corporate profit margins, and rebounding energy profits. Potential policy actions, most notably corporate tax reform (including repatriation of overseas cash), offer the possibility of upside, while risks include trade protectionism and further strength in the U.S. dollar.
  • Welcome to January. After the S&P 500 gained 1.8% in December to finish off a nice year of equity gains in 2016, we now turn the page to January. Since 1950[1], January has been up 1% on average–ranking it right near the middle of all months by performance (sixth out of 12). What is worth noting is January has been weak recently, falling each of the past three years. Be aware though, that going back to 1928, the S&P 500 has never been down in January for four consecutive years. Over the past 10 years, January has been down 1.7% on average, ranking worst of all months.
  • European inflation grows. European inflation came in somewhat greater than expected. German inflation rose 1.7%, still below the European Central Bank’s 2% target, but greater than the 1.3% increase expected. Some of the increase in inflation, not just in Germany but globally, results from oil prices being approximately 50% greater than they were one year ago. However, inflation was higher than expected across many sectors of the German economy, not just the energy sector. In contrast, French inflation was up just 0.8%, with an increase in energy-related inflation but a decline in inflation from other sectors of the economy. Should oil prices stay where they are, they will continue to be a major inflation driver across the region.
  • Chinese data improve. The Caixin Purchasing Managers Index (PMI) rose to 51.9 in November, better than previous readings and analysts’ forecasts. The Caixin index covers mid cap and small cap companies, and is often seen as a more reliable number as it is less influenced by government spending. Chinese stocks, both on the mainland and in Hong Kong, were up sharply overnight. There has been something of a change in attitude among Chinese traders. For much of the last two years, the markets reacted as though “bad news is good news,” believing that bad news would spur Chinese government policy. After a series of economic policy moves last year, traders appear to be more willing to let “good news be good news.”

MonitoringWeek_header

Monday

  • Japan: Nikkei Mfg. PMI (Dec)

Tuesday

  • ISM Mfg. (Dec)
  • Germany: CPI (Dec)
  • China: Caixin PMI Services (Dec)

Wednesday

  • Vehicle Sales (Dec)
  • Minutes of the December 13-14 FOMC Meeting Released
  • Eurozone: CPI (Dec)

Thursday

  • ADP Employment (Dec)
  • ISM Non-Mfg. (Dec)

Friday

  • Employment Report (Dec)
  • Evans (Dove)
  • Lacker (Hawk)
  • Eurozone: Economic Confidence (Dec)

Saturday

  • China: Imports and Exports (Dec)

 

 

 

 

 

 

 

¹ 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.

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.

Market Update: November 28, 2016

MarketUpdate_header

  • Markets inch lower to begin data-heavy week. U.S. equities are pulling back modestly this morning as investors pause following a record-setting week for major indexes and ahead of a swath of economic data due out this week, including Friday’s non farm payrolls report. Volatility in WTI crude oil prices is also adding to caution amid doubts a deal will be reached at Wednesday’s OPEC meeting. As expected, Friday’s shortened session saw low volume, and the major averages all moved modestly higher (S&P 500 +0.5%); utilities (+1.4%) and telecom (+1.1%) outperformed, while only the energy sector (-0.4%) lost ground on the day, trading lower alongside a 3% drop in oil. Asian markets finished mostly positive overnight Monday, with the exception of the Nikkei (-0.1%) due to a strengthening yen. Italy’s MIB (-0.9%) is leading the retreat in European stocks ahead of Sunday’s constitutional referendum. Finally, oil is back in positive territory by over 2% ($47.15/barrel) after seeing sharp declines overnight, COMEX gold ($1186/oz.) has advanced 0.6% after touching nine-month lows on Friday, and the yield on the 10-year Treasury is down 2 basis points to 2.33%.

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  • Corporate Beige Book shows improved sentiment among corporate executives, based on the use of more strong words relative to weak ones in earnings conference calls during Q3 2016 earnings season. Talk of recession was virtually non-existent, election comments were minimal, and fewer mentions of currency suggested limited Brexit disruption and reflected a smaller currency drag on earnings. Meanwhile, oil and China continued to garner a lot attention. We believe Q3 results were strong enough to justify the improved tone from corporate executives and support our expectation for mid- to high-single-digit earnings growth in 2017.
  • Soft Black Friday shopping weekend reflects shifting retailer behavior, not consumer weakness. The National Retail Federation (NRF) said shoppers spent 3.5% less over the four-day Black Friday weekend than they did in 2015. The NRF said the decline in spending was a function of earlier promotions and longer-lived discounts. The trade group maintained its 3.6% growth forecast for holiday spending. Within these sales totals, online sales were very strong, rising 18% year over year on Thanksgiving and Black Friday, according to Adobe, and more people shopped online than in stores over the weekend.
  • OPEC deal in doubt? Headlines are all over the place regarding the likelihood of a deal. Comments out of Saudi Arabia suggesting the oil market would balance itself in 2017 even without a deal, coupled with Iran’s continued push for an exemption, suggested a deal was unlikely. On the flip side, Saudi Arabia’s comments are likely intended to increase negotiating leverage, while Iraq has stated its desire to cooperate with other OPEC members to reach an agreement. This one is tough to call, but our bias would be to buy on weakness in the absence of a deal should oil prices return to $40 a barrel or lower.
  • S&P 500 scores more new highs. The week of Thanksgiving tends to have a bullish bias and that played out this year, as the S&P 500 gained all four days of the week to close higher by 1.4%, the third straight higher weekly close. Interestingly, this was the third consecutive election year that the week of Thanksgiving was higher all four days. In the process, the S&P 500 closed at a new all-time high four consecutive days for the second time this year (it did it in July as well), but the index hasn’t closed at new highs five straight days since November 2014. Speaking of November, the S&P 500 is now up 4.1% for the month, the second best November return going back 14 years. As another way to show how strong the market has been, the S&P 500 hasn’t violated the previous day’s low for an amazing 14 consecutive days, which is the longest streak since 15 in a row in November 2004.
  • Small caps continue to soar. The Russell 2000 (RUT), a proxy for small caps, is up an incredible 15 days in a row. This now ties the streak of 15 in a row from February 1996 for the second-longest win streak ever. The record is 21 straight green days in 1988. Lastly, the RUT has made a new high nine straight days for the first time since September 1997 and the last time it made it to 10 in a row was May 1996.
  • Here comes December. The upcoming month is full of potential market-moving events. Historically, December is a strong month for the S&P 500; since 1950[1], no month sports a better average gain or is positive more often. Still, with the first Federal Reserve Bank (Fed) rate hike of the year likely coming in the middle of the month, the potential for a volatile month is much higher. Factoring in a highly anticipated OPEC meeting, the November employment report, elections in Austria and constitutional referendum in Italy, and a European Central Bank (ECB) meeting – you have all the ingredients for some big market moves in December. We will take a closer look at all of these events, along with the Santa Claus rally.

[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

  • ECB’s Draghi Speaks in Brussels
  • OECD releases 2017 Economic Outlook

Tuesday

  • GDP (Q3 – Revised)
  • Dudley (Dove)
  • Germany: CPI (Nov)

Wednesday

  • Personal Income and Spending (Oct)
  • Chicago Area PMI (Nov)
  • Beige Book
  • Mester (Hawk)
  • OPEC Meeting in Vienna
  • China: Official Mfg. PMI (Nov)
  • China: Official Non-Mfg. PMI (Nov)
  • China: Caixin Mfg. PMI (Nov)

Thursday

  • ISM Mfg. (Nov)
  • Vehicle Sales (Nov)
  • Mester (Hawk)

Friday

  • Employment Report (Nov)

 

 

 

 

 

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: March 15, 2016

Global stocks were mixed for the week, largely driven by the European Central Bank’s (ECB) move to cut rates further into negative territory. All our major domestic indices posted positive returns with the S&P 500 and the Dow Jones Industrial Average both up over 100 basis points at 1.09 percent and 1.19 percent, respectively. The tech-heavy NASDAQ Composite was up 0.65 percent. European stocks seesawed in response to the ECB with the STOXX Europe 600 Index closing the week up less than 1 percent despite significant up and down days. Asian stocks were down slightly with Japan’s Nikkei 225 Average Index down 0.45 percent and China’s Shanghai Composite Index down 2.22 percent.

Oil

Oil had a volatile week as a number of factors were impacting investor sentiment. OPEC’s possible production agreement, global oversupply, and shifts in seasonal production all influenced the price. The market continues to focus on the Organization of the Petroleum Exporting Countries (OPEC) and whether or not they can come to an agreement with other non-OPEC members to cap production and drive up prices. While there is a lot of talk among the member states, it doesn’t appear there will be consensus anytime soon. Indeed, Saudi Arabia has publicly stated it will maintain production at current levels for at least the next five years. These are hardly the words of a country that is willing to cooperate and lower its oil production. In addition, the oil market will likely also suffer from seasonal oversupply as we enter the spring and summer months. Refineries typically ramp up production in spring to keep up with the seasonal demand shift as the summer months tend to have the highest demand for oil and gasoline products. We continue to believe oil prices will remain lower for longer because, as prices move into the $40-$45 per barrel range, more producers will be profitable and ramp up production. This will ultimately increase supply and likely depress prices again, assuming demand stays the same or it does not outpace the growth in supply. In fact, our analysts don’t see oil past $60 per barrel until closer to 2020.

WWA

European Central Bank

In what was largely anticipated by the markets, the European Central Bank (ECB) nudged its key interest rate further negative last Thursday in an attempt to lower rates and buoy the European markets. However, the scope of the move was greater than many analysts had expected. The rate was lowered to -0.40 percent, from -0.30 percent, and the ECB expanded its asset-purchase program from $60 billion to $80 billion euros a month which includes corporate bonds. Global equities were generally up in response initially but turned down later in the day when the ECB president, Mario Draghi, said he did not anticipate the need to reduce rates further. Global markets appeared to shrug those comments off and finished Friday firmly in positive territory. While many investors have grown accustomed to central banks maintaining a negative interest rate policy (NIRP), the phenomenon is still very new to the financial markets. Because of this, little is known about the market’s reaction to even lower negative rates or prolonged periods of NIRPs. Going into 2016, the Eurozone, Switzerland, Sweden, and Denmark all had negative interest rates maintained by their respective central banks. Japan jumped into the fray after cutting its key rate below zero in January, but the Japanese equity markets suffered a bout of selling on the news. The Bank for International Settlements, a Switzerland-based conglomerate of central banks, is warning the markets the efficacy of negative interest rate policies could be diminishing. Indeed, they point to the market’s reaction to Japan’s negative interest rates that saw large flows into sovereign government bonds despite many of them trading at negative rates. However, we would note there were other global events that overshadowed Japan’s policy shift and drove investors to seek relative safety in the form of those high-quality government bonds.

WWAA

Short-Term Yields Rise

Interest rates can be a useful bellwether when measuring the risk appetite for investors. Generally, higher interest rates indicate investors are more willing to take on market risk, primarily through equities and non-fixed income investments. In contrast, lower interest rates signal the market is taking a more cautious approach as investors move into bonds. This dynamic is driven by the relationship between bond prices and interest rates. As investors sell bonds and buy stocks, the prices on those bonds fall and the interest rates go up. The opposite happens when they move back into bonds: yields will fall as the prices go up with demand. According to the data, short-term yields on two-year Treasury bonds jumped to their highest mark since the first week of January as investors started moving into equities. This was primarily in reaction to the ECB’s policy actions and stronger-than-expected U.S. economic data. While this doesn’t guarantee a permanent shift in investor sentiment, it is an indication the markets are willing to wade a little deeper into the equity markets and take on some more risk.

Fun Story of the Week

Have you ever wondered why buttons for men’s shirts are on the right but on the left for women? There are some interesting theories as to why there is a difference and it serves as an everyday reminder of the history of clothing, tradition, and warfare. Yes, warfare. For men, having the buttons on the right can be traced directly to military dress. Men often wore swords and, being the majority of people are right-handed, that meant the sword and scabbard were worn on the left. One of the more prominent theories is, when sword fighting, men would typically reach across their body to grab the sword on their left while unbuttoning the jacket with the left hand to allow for more flexibility. This, of course, doesn’t explain why women’s buttons are on the other side. There are a few theories that attempt to explain the difference and one such theory has to do with horse riding. Women who rode horses did so sidesaddle, facing the left side of the horse. By putting buttons on the left side, it helped reduce the breeze that would flow into the shirt as they rode along. Another theory, and perhaps a more reasonable one, posits that, when clothing was becoming standardized, many women did not, in fact, dress themselves. While it may be hard to believe today, buttons were once very expensive and were a favorite of the wealthy. So, when women wore elaborately buttoned clothing, having the buttons on the left side made it easier for the servants to help them get dressed.

Weekly Market Commentary: March 14, 2016

Provided by geralt/Pixabay
Provided by geralt/Pixabay

Stim-u-late mar-kets! Come on! It’s monetary easing.*

The European Central Bank (ECB) was singing a tune that invigorated financial markets last week. The Wall Street Journal explained:

“The fresh measures included cuts to all three of the ECB’s main interest rates, €20 billion a month of additional bond purchases atop the ECB’s current €60 billion ($67 billion) program, and an expansion of its quantitative easing program to highly rated corporate bonds – all more aggressive steps than analysts had anticipated. The central bank also announced a series of ultracheap four-year loans to banks, some of which could be paid to borrow from the ECB.”

Most national indices in Europe gained ground last week. The Financial Times Stock Exchange Milano Italia Borsa (FTSE MIB), which measures the performance of the 40 most-traded stocks on the Italian national stock exchange, was up almost 4 percent. Spain’s Indice Bursatil Español Index (IBEX 35), which is comprised of the most liquid stocks trading on the Spanish continuous market, gained more than 3 percent. Major markets in the United States moved higher, as well.

Of course, the harmony provided by global oil markets proved pleasing to investors, too. An International Energy Agency (IEA) report suggested more equitable supply and demand balances could mean oil prices have bottomed out.

Barron’s offered a word of caution, “Investors shouldn’t get too comfortable when it seems that oil moves and central-bank maneuvers are the main reason stocks go up or down, not earnings and economic growth.”

*Set to the tune of Kool and the Gang’s ‘Celebration.’ You know, “Cel-e-brate good times! Come on! It’s a celebration.”

Data as of 3/11/16 1-Week Y-T-D 1-Year 3-Year 5-Year 10-Year
Standard & Poor’s 500 (Domestic Stocks) 1.1% -1.1% -0.9% 9.1% 9.2% 4.7%
Dow Jones Global ex-U.S. 1.1 -2.5 -9.6 -2.3 -1.6 1.3
10-year Treasury Note (Yield Only) 2.0 NA 2.1 2.1 3.4 4.8
Gold (per ounce) -1.0 19.1 10.0 -7.1 -2.2 8.8
Bloomberg Commodity Index 2.0 1.8 -19.6 -16.5 -13.3 -6.8
DJ Equity All REIT Total Return Index 1.7 1.7 4.7 9.0 11.0 6.4

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.

This Will Drive Markets in ‘Most Important’ Week

Markets could be in for macro overload in the week ahead with central bankers, next Friday’s jobs report and OPEC dominating the headlines.

“My guess is most of the action will be a tail wind for stocks,” said Jack Ablin, CIO of BMO Private Bank.

Central bankers in the U.S. and Europe are in high gear in the coming week, with the European Central Bank expected to expand its easing program and cut its already negative deposit rate. That coincides with a week that could bring the most important U.S. jobs report and other data the Fed will consider when it meets Dec. 15 and 16.

Provided by CNBC

“I think people should be starting to shift their focus away from the December meeting because they’re going to raise. They should be asking themselves if the economic data is good enough to augur a multi-rate hike cycle, rather than just a one and done,” said Peter Boockvar, chief market analyst at Lindsey Group.

Next Friday’s November employment report is expected to show 200,000 nonfarm payrolls and an unchanged unemployment rate of 5 percent, after October’s surprisingly strong 271,000 jobs. Wages are projected to rise 0.2 percent, after October’s unexpected 0.4 percent increase.

“The shift is really back to the economic data and away from all the earnings we’ve seen. We of course get ‘Class A’ type data. It’s not just the jobs report, but the ISM manufacturing number and vehicle sales,” said Boockvar.

The Thanksgiving week is typically positive for stocks, but the market ended it mixed and flattish. The S&P 500  (.SPX) closed up 0.04 percent for the week to 2,090, while the Dow  (.DJI) fell 0.14 percent to 17,798.

In the coming week, there are also several important Fed appearances, including two by Chair Janet Yellen. She speaks to the Economic Club of Washington on Wednesday and testifies before the congressional Joint Economic Committee on Thursday, giving her opportunities to reinforce the Fed’s message on the potential for a December rate increase.

“She just wants to firmly set expectations. Assuming no disasters, they’ll raise rates. She has to stay on message. When you’re 2 ½ weeks from your first rate hike in nine years, you have to start steering people into the same camp,” Boockvar said.

Barclays chief U.S. economist, Michael Gapen, said the jobs report would have to be shockingly weak for the Fed to hold off on a rate rise. “I doubt we’re going to see a number that was as strong as last month, but you need a number like 50,000 or 75,000 for the Fed not to go in December. There’s a low bar for this report to clear,” said Gapen.

As for the oil market, the Organization of the Petroleum Exporting Countries is not expected to change its stance on letting the market set prices when it meets next Friday. A year ago, OPEC said it would not cut back on output unless other higher-cost producers did the same and instead, it would let the market set the price. The market did drive the price, and oil is now trading in the low $40s a barrel.

In the past week, oil prices rose as the market focused on geopolitical concerns, with the downing of a Russian jet by Turkey. But by Friday, most of that premium was out of the price, as traders once more focused on high supplies and still-growing inventories.

“I think the members that matter, the Saudis and close partners are simply maintaining output and letting the rebalancing play out. It hasn’t played out as they intended but they’re locked into it now,” said Greg Priddy, director of global energy and natural resources at the Eurasia Group.

Analysts say OPEC could manage to talk down prices even further, depending on the rhetoric from its meeting, where some members like Venezuela will continue pushing for production cuts and other members will resist.

“I think we’re going to have inventories accumulating through 2016,” said Priddy. “We’re not going to have inventory drawdowns until 2017, and that’s because Iran is coming on … but it will be accumulating at a much lower pace as we get into the second half of the year.”

Other important events in the coming week include the IMF‘s decision Monday on China’s currency. It is expected to vote to include the yuan in the fund’s Special Drawing Rights basket which, while largely symbolic, would elevate the currency and China’s influence in the global economy.

Analysts don’t expect the move to have a big impact immediately, but ultimately it could be a factor in opening China’s capital markets.

The dollar  (.DXY) will also be a big focus in the week ahead, as the diverging paths of the Federal Reserve and ECB and other central banks has been driving it higher. The euro in the past week fell below $1.06 and the dollar index rose above 100.

“Next week could be one of the most important weeks of the year,” said Marc Chandler, head of foreign exchange strategy at Brown Brothers Harriman.

Some strategists expect the jobs number to be the big mover for currencies, but Chandler said there’s scope for the ECB to surprise. “More often than not, [Mario] Draghi has surprised the markets with his dovishness,” he said.

The ECB could push out the timetable for its easing program into 2017, and expand the type and quantity of securities it is buying.

Ablin said investors are also awaiting any data that reveal how holiday shopping is going over the weekend and on Cyber Monday.

“We’re all going to wait on the retail data. How meaningful it is, I don’t know. Are the brick-and-mortar retailers going to get hammered or are investors overly concerned?” he said.

Chart of the Week: November 30, 2015

Screen Shot 2015-11-30 at 3.39.39 PM

Diverging central bank policy has been a well-televised theme in 2015, and in mid-December, divergence may finally begin. This week, the European Central Bank may ease monetary policy further in an effort to stimulate inflation expectations across the European economy, and two weeks later, the Federal Reserve is expected to raise the federal funds rate. Though the expectation of these policy moves is fairly consensus, the financial impact is largely unknown. For example, rising short-term rates in the U.S. and lower rates in Europe should, in theory, lead to dollar appreciation. However, the expected difference in interest rates may already be priced in. Turning to long rates, the impact of diverging monetary policies is more apparent. This week’s chart shows the positive correlation between 10-year government bond yields in Germany and the U.S., which suggests that low rates in Europe will likely anchor long rates in the U.S. While U.S. government bonds may face some headwinds, even from a gradual increase in rates, the more credit-sensitive sectors of the bond market may not feel this same pain. In fact, slowly rising interest rates are a navigable headwind for credit, as this has historically led to tighter spreads, rather than higher yields, and is therefore less pain for investors in this space.

For more information please visit the Source below.

(Source: JPMorgan)