Market Update: June 12, 2017

MarketUpdate_header

Last Week’s Market Activity

  • Nasdaq tumbled 1.8% Friday, its biggest one-day drop since June 2016. Tech weakness, attributed to crowded investor positioning, outsized 2017 gains, and cautious sell side commentary, powered substantial value outperformance relative to growth. Dow, Russell 2000 gained (0.4%), while S&P 500 ended flat.
  • Energy (+2.5%) led Friday’s market action, followed by financials (+1.9%);both benefited from tech outflows.
  • Treasuries fell modestly, helping banks (10-year Treasury yield ended at 2.20%).
  • Dollar and WTI crude oil up, COMEX gold down.Dollar rise dragged gold down 0.6% to >$1270. Oil gained 0.4% to ~$46/bbl, boosting the energy sector attempted recovery from inventory-driven losses earlier in the week. Copper rose for the third straight session.
  • Muted reaction to U.K. election as pound sold off (which eroded U.K. returns for U.S. investors) but U.K. stocks in local currency generally shrugged off surprise election result.
  • Mixed week. Friday’s rotation was evident in weekly performance with Dow (+0.3%), Russell 2000 (+1.2%) faring well, S&P 500 down slightly (-0.3%), Nasdaq down sharply (-1.6%). Despite the week’s big political stories, broadest equity market averages didn’t move much.

Overnight & This Morning

  • S&P 500 down as Friday’s technology sell-off carries over into morning trading.
  • Technology weakness weighed on Asian markets:Nikkei slipped 0.5%, Shanghai Composite lost 0.6%, Hang Sang fell 1.24%. Spillover into Europe as well. Core European markets down nearly 1% in midday trading.
  • Treasuries unchanged, dollar is lower vs. euro and yen; Gold is little changed.
  • Oil rebound (+1.6%) follows Friday’s gains as the commodity struggles to maintain support in the mid $40s.
  • More European election results. French President Macron’s party set for a big parliamentary majority following Sunday’s first-round vote. Regional Italian elections saw anti-euro 5-Star Movement underperform. In the U.K. we’re watching the formation of political alliances to determine potential Brexit/trade impact.
  • Trump administration’s focus this week to be on apprenticeships, jobs following last week’s infrastructure push.
  • Financial regulation also making headlines as Dodd-Frank revamp accelerates and parts of the DOL’s Fiduciary Rule go into effect. Look for easing of regulatory burden on smaller financial institutions, positive for regional banks.

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Key Insights

  • Reflation rotation? Friday’s sharp moves (technology down and financials, energy and small caps up) appeared to be rotation from areas that have been working to those that haven’t given the broad averages did not move much. Technology was a source of funds for energy, financials, and small cap purchases, areas that tend to benefit from stronger economic growth, higher interest rates and inflation. We still favor the technology sector and, for those currently underweight the sector, we would view further weakness as a potential opportunity to add exposure.
  • We expect a rate hike on Wednesday and will be watching closely for clues about the Federal Reserve’s (Fed) rate path for the rest of 2017. Market participants will scrutinize the Fed statement and press conference for any changes to economic growth or inflation outlooks, and any additional details regarding balance sheet normalization. We remain on the fence about whether we get another hike in 2017 after the presumed move this week but, regardless, we see modest additional return potential for both stocks and bonds over the balance of the year.
  • Market warning to Fed? The fact that markets are pricing in a flatter trajectory of rate hikes moving forward, and that even relatively short-term two-year Treasury yields are flat compared to levels seen in the aftermath of the Fed’s March meeting, may be the market’s way of warning the Fed that, with inflation expectations broadly contained, being too aggressive with rate hikes in the near term may harm growth.

Macro Notes

  • Big drop for tech. Technology dragged the Nasdaq down 1.8% for its third worst day of the year and its worst week year to date (-1.5%). What made this big drop unique was it came the day after setting a new all-time high. Other than a 2.6% drop in May, you have to go back to March 2000 the last time there was a larger drop from an all-time high for the Nasdaq.
  • When does the June swoon happen? We noted at the start of the month that June has historically been a weak month for equities and over the past 10 years only January has been worse for the S&P 500 Index. Taking a closer look at the monthly performance though shows it is usually the second half of June that tends to see most of the weakness. With the Fed and Bank of Japan on tap for meetings this week, could it be time for some volatility?

MonitoringWeek_header

Monday

  • Monthly Budget Statement (May)
  • Japan: Machine Orders (Apr)

Tuesday

  • PPI (May)
  • UK: CPI & PPI (May)
  • UK: Retail Price Index (May)
  • Germany: ZEW Survey (June)
  • China: Industrial Production

Wednesday

  • CPI (May)
  • Retail Sales (May)
  • FOMC Rate Decision (June 14)
  • Yellen Press Conference
  • Germany: CPI (May)
  • Eurozone: Industrial Production (Apr)
  • UK: Jobless Claims (May)
  • UK: Unemployment Rate (Apr)
  • New Zealand: GDP (Q1)
  • Japan: Industrial Production and Capacity Utilization (Apr)

Thursday

  • Empire State Mfg. Report (June)
  • Philadelphia Fed Mfg. Report (June)
  • Industrial Production and Capacity Utilization (May)
  • US Treasury International and Capacity Utilization (May)
  • US Foreign Net Transactions (Apr)
  • BOJ: Policy Balance Rate and 10-Yr Yield Target
  • Bank of England: Bank Rate Decision

Friday

  • Housing Starts (May)
  • Building Permits (May)
  • Eurozone: New Car Registration (May)
  • Eurozone: CPI (May)
  • Russia: GDP (Q1)
  • Bank of Russia: Key Rate Decision
  • China: New Loan Growth and Money Supply (May)

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

 

Market Update: March 20, 2017

MarketUpdate_header

  • Stocks little changed following G20. Major indexes are near flat this morning as stocks search for direction amid little economic data and traders assess the impact of the weekend’s G20 summit, which ended with a whimper. This follows a quiet session on Friday in which the heavily-weighted financials (-1.1%) sector kept the S&P 500 (-0.1%) underwater. Overseas, Asian markets were mixed overnight with the Shanghai Composite (+0.4%) and Hang Seng (+0.8%) moving higher while stocks in India and South Korea finished lower; the Nikkei was closed for a holiday. Europe is mostly lower midday with the STOXX 600 down 0.2%, though off session lows. Elsewhere, WTI crude oil is retracing Friday’s gains, COMEX gold is ticking higher as the dollar continues to weaken, and 10-year Treasury yields are unchanged at 2.50%.

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  • Housing data, Fed speakers highlight the week ahead. This week, we get some key data points on housing, with existing home sales on Wednesday and new home sales on Friday. We also get data on manufacturing with both durable goods orders and Markit’s Manufacturing Purchasing Managers’ Index (PMI) on Friday. Nine Fed members, including four voting members (Yellen, Dudley, Evans, and Kashkari) are lined up to speak this week, providing an opportunity for further insight on last week’s rate hike.
  • Industrial production flat, but manufacturing improving. Industrial production was flat in February, missing expectations of 0.2% growth, although a 0.2% upward revision to January provided an offset. Utility production held the overall industrial production number down after another warm month, but manufacturing production rose 0.5%, topping expectations of 0.4%, a meaningful beat given it came on top of a 0.3% upward revision to January’s data. The gains provide further evidence of a strengthening rebound in manufacturing already being signaled by the Institute for Supply Management’s (ISM) Purchasing Managers’ Index (PMI) and several regional manufacturing indexes.
  • Leading indicators remain strong. The Conference Board’s Leading Economic Index (LEI) rose 0.6% in February, topping consensus expectations and matching similarly strong gains in December and January. The largest positive contributor for the month was the ISM new orders index, reflecting recent gains in manufacturing. The index accelerated to a 3.1% gain year over year, its highest growth rate since August 2015. The LEI continues to point to a low chance of a recession in the next year.
  • In the spirit of March Madness, we have compiled our “Sweet 16” for the stock market. Specifically, we have identified 16 keys-many of them policy related-for stocks for the rest of 2017 and assessed their implications for the stock market. While the path for several policy-related areas is uncertain, we still expect a solid year for stocks in 2017-potentially even slightly above our S&P 500 target of mid-single-digit gains[1] depending on the exact policy path. Look for a deeper dive into four of these 16 keys to the market in our “Final Four” next week.
  • Big bounce for small caps. The Russell 2000 (RUT) was up 1.9% last week, which was the largest weekly gain of the year for small caps and the best weekly bounce since early December. This is a nice change, as small caps have lagged most of 2017 after an 8.4% gain during the fourth quarter of last year. In fact, year to date, the RUT is up only 2.5% versus 6.2% for the S&P 500. Many have blamed the recent underperformance on investor skepticism on how quickly tax cuts and infrastructure spending will be implemented. At the same time, some weakness after the huge fourth quarter rally is perfectly normal.

 

MonitoringWeek_header

Monday

  • Evans (Dove)

Tuesday

  • Dudley (Dove)

Wednesday

  • Existing Homes Sales (Feb)

Thursday

  • New Home Sales (Feb)
  • Yellen (Dove)
  • Kashkari (Dove)
  • Kaplan (Hawk)
  • Eurozone: Consumer Confidence (Mar)
  • Japan: Nikkei Mfg. PMI (Mar)

Friday

  • Durable Goods Orders and Shipments (Feb)
  • Markit Mfg. PMI (Mar)
  • Eurozone: Markit PMI (Mar)

Saturday

  • China: PBOC’s Zhou Speech

 

 

 

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

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

 

Market Update: March 13, 2017

MarketUpdate_header

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

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

MonitoringWeek_header

Monday

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

 Tuesday

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

 Wednesday

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

 Thursday

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

 Friday

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

 

 

 

 

 

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, political risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better. Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk. Because of its narrow focus, sector investing will be subject to greater volatility than investing more broadly across many sectors and companies. Commodity-linked investments may be more volatile and less liquid than the underlying instruments or measures, and their value may be affected by the performance of the overall commodities baskets as well as weather, disease, and regulatory developments. Government bonds and Treasury bills are guaranteed by the U.S. government as to the timely payment of principal and interest and, if held to maturity, offer a fixed rate of return and fixed principal value. However, the value of fund shares is not guaranteed and will fluctuate. Investing in foreign and emerging markets debt securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical and regulatory risk, and risk associated with varying settlement standards. High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors. Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply. Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained. Currency risk is a form of risk that arises from the change in price of one currency against another. Whenever investors or companies have assets or business operations across national borders, they face currency risk if their positions are not hedged. This research material has been prepared by LPL Financial LLC.

Market Update: February 27, 2017

MarketUpdate_header

  • Stocks lower as busy week begins. Markets are lower this morning as investors evaluate mixed durable goods orders data and await several Fed speakers and President Trump’s address to Congress this week. Domestic stocks rallied at the end of the day on Friday, helping the Dow notch its eleventh consecutive gain; the S&P 500 was up 0.2%. Rate-sensitive utilities (+1.5%) and telecom (+0.7%) outperformed while energy (-0.9%) and financials (-0.7%) were the only sectors to lose ground. Overnight in Asia, the Nikkei (-0.9%) and Shanghai Composite (-0.8%) led broad declines in the region, while most European exchanges are modestly lower in afternoon trading, although Italy’s MIB (+1.5%) is bucking the trend.  Elsewhere, WTI crude oil ($54.38/barrel) is up 0.7%, COMEX gold ($1259/oz.) is near flat, and the yield on the 10-year Treasury note is up three basis points (0.03%) to 2.34%.

MacroView_header

  • Earnings season winds down this week. With 32 S&P 500 companies slated to report this week and 460 having reported already, this week effectively marks the end of fourth quarter earnings season. S&P 500 earnings growth for the quarter is tracking to solid 7.7% growth according to Thomson Reuters data, less than 2% above prior estimates, while revenue growth is tracking to a very respectable 4.3% increase. While fourth quarter upside is below average, the growth rate is a meaningful improvement from the 4% growth rate in the third quarter of 2016 and flat or negative growth for several quarters before that. Looking forward, the modest 1% drop in 2017 S&P 500 earnings estimates, which remain 10-11% above 2016 earnings, is an encouraging sign. We believe our mid- to high-single-digit S&P 500 earnings growth forecast for 2017[1] is achievable given our expectation for better economic growth and potential for a policy boost.

021717_earningsdashboard-011

  • Busy start to a very busy month. This is an incredibly busy week for economic data and events around the globe. In the U.S., President Trump will address a joint session of Congress on Tuesday night, and Fed Chair Yellen and Vice Chair Fischer will deliver speeches on Friday. In addition, there are half a dozen other FOMC members on the docket this week, and the Fed will also release its Beige Book Wednesday March 1 ahead of the March 14-15, 2017 meeting. In addition to that, data for January and February on ISM (manufacturing and non manufacturing), vehicle sales, and pending home sales are due out. Overseas, the U.K.’s House of Lords will begin debate on Article 50 (aka Brexit), China will release key data in manufacturing and service sector activity, and in Europe, February data on CPI and bank lending for January will be closely watched.
  • Durable goods order and shipments. Sizable upward revisions to prior months’ data offsets weaker than expected January reading. New orders for “core” durable goods fell 0.4% between December and January, but the December reading, initially reported as a 0.7% gain, was revised up to show a 1.1% increase instead. The durable goods data are notoriously volatile month-to-month and subject to large revisions.  Looking at changes over three months can help to smooth out some of the inherent volatility, and in the three months ending January 2017, core durable goods orders rose 9%, a clear acceleration from the 4% gain posted in the three months ending October 2016. The acceleration in orders in the past three months suggests that business capital spending is likely to be a plus for GDP in the first half of 2017.
  • Up five weeks in a row. The S&P 500 had a late-day surge on Friday to close higher for the fifth consecutive week for the first time since coming off of the February 2016 lows. Momentum seems to stay in play after long weekly win streaks, as the past 10 times the S&P 500 was up five consecutive weeks, it was higher two weeks later nine times. Under the surface though there was a unique development, as the Dow Jones Utility Average had its best week since early July – up 4.1%. In fact, since the bull market started nearly eight years ago, that type of weekly move happens only 2.9% of the time. Three of the four days last week saw utilities gain at least 1%, which hasn’t happened since October 2015. Historically, utilities taking the lead has been a warning sign, as defensive names find a bid.
  • Dow does it again. It took a nice-sized rally the last 20 minutes of the day, but the Dow eked out a gain of 0.05% on Friday. This was the eleventh consecutive record high, with only one streak longer since 1900 (12 in a row in 1987). In terms of any winning streaks, not just record highs, the current streak of 11 in a row is the most since early 1992.

MonitoringWeek_header

Monday

  • Durable Goods Orders and Shipments (Jan)
  • Dallas Fed Mfg. Report (Feb)
  • Kaplan (Hawk)
  • Eurozone: Money Supply and Bank Lending (Jan)
  • Germany: Retail Sales
  • UK House of Lords Begins Debate on Article 50

Tuesday

  • Chicago Area Purchasing Managers Report (Feb)
  • Richmond Fed Mfg. Report (Feb)
  • Williams (Dove)
  • Bullard (Dove)
  • Eurozone: CPI (Feb)
  • President Trump Addresses a Joint Session of Congress
  • China: Official Mfg. PMI (Feb)
  • China: Official Non-Mfg. PMI (Feb)
  • China: Caixin Mfg. PMI (Feb)

Wednesday

  • ISM Mfg. (Feb)
  • Vehicle Sales (Feb)
  • Beige Book
  • Kaplan (Hawk)
  • UK: Bank Lending and Money Supply (Jan)
  • Germany: CPI (Feb)
  • Canada: Bank of Canada Meeting (No Change Expected)

Thursday

  • Challenger Job Cut Announcements (Feb)
  • Mester (Hawk)
  • China: Caixin PMI Services (Feb)
  • Japan: Jobless Rate (Jan)

Friday

  • ISM Non Mfg. (Feb)
  • Yellen (Dove)
  • Fischer (Dove)

Sunday

  • China: National People’s Congress Meeting Begins in Beijing.

 

 

 

 

 

 

 

 

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

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. 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: February 21, 2017

© Susan Walsh/AP Photo

MarketUpdate_header

  • Stock advance continues following record-setting week. U.S. stocks are moving higher in early trading as markets reopen following the Presidents’ Day holiday. All three major averages ended the prior week at record highs; the S&P 500 (+0.2%) advanced modestly as telecom (+0.9%) was the best performing sector. Equities in Asia closed mostly higher overnight amid a quiet session, though the Hang Seng lost 0.8%. European markets are seeing broad strength in afternoon trading (STOXX Europe 600 +0.5%) as investors sift through PMI data that came in mostly above expectations; the U.K.’s FTSE is the exception (-0.1%) as disappointing earnings in the banking sector drag it lower. Finally, Treasuries are losing ground as the yield on the 10-year note is up to 2.44%, WTI crude oil ($54.78/barrel) is up 1.9%, and COMEX gold ($1234/oz.) is slipping 0.4%.

MacroView_header

  • Treasury prices initially lower, then rebound late week. Last week began with Chinese consumer price index (CPI) and producer price index (PPI) data rising much more than analyst estimates, setting the tone for more inflationary pressure on U.S. Treasuries. On Tuesday, Federal Reserve Chair Yellen, in her semi-annual testimony before Congress, stated that it would be “unwise to wait too long to hike interest rates.” This moved the yield on the U.S. 10-year Treasury higher by 8 basis points (0.08%) to 2.52%, as investors began to price in a March rate hike. Thursday’s session saw a slight rebound in prices following a move lower in European yields as the Greek bond market stabilized. This week, investors will be watching the economic calendar for more evidence of inflation.
  • Inflation expectations edge up. The 10-year breakeven inflation rate finished last week slightly higher, moving from 2.01% to 2.02%. Importantly, the breakeven rate is above the Fed’s 2% inflation target. This week, we take a deeper look at Treasury Inflation-Protected Securities (TIPS) and why, despite solid performance relative to Treasuries in the second half of 2016, there may be further opportunity within the asset class for investors seeking credit and inflation protection.
  • Municipals supply lower on the week. Muni supply, as measured by the Bond Buyer 30-day visible supply data, remains below the 10-year average of approximately $11 billion, coming in at $7.5 billion last week. Supply is expected to remain light due to the holiday-shortened week. However, March and April supply is expected to grow as the Bloomberg fixed rate calendar supply data already shows an increase in supply from $6 billion on Thursday, February 16 to $7.6 billion today.
  • Investment-grade corporates spread breaches 1.2% level. As measured by the Bloomberg Barclays US Corporate Index, this level had provided resistance since late January. As equities made a decisive move higher over the last two weeks, investment-grade corporates have followed suit. Equity strength, investors’ demand for high-quality yield (above that of Treasuries), and increased prospects for corporate tax reform were all contributed to the spread contraction.
  • Earnings dipped last week but estimates still holding firm. Q4 2016 earnings for the S&P 500 are now tracking to a 7.5% year-over-year increase (as measured by Thomson), down about 1% over the past week on insurance industry declines. Financials and technology are still on course for solid double-digit earnings gains. While a 7.5% growth rate is certainly nothing to sneeze at, the better news may be that consensus 2017 estimates are down only 1.1% since earnings season began (and still up over 10% versus 2016), buoyed by flat or positive revisions to financials, energy and industrials estimates. Interestingly, these sectors are particularly policy sensitive, suggesting policy hopes are seeping into analyst and management team outlooks.

021717_earningsdashboard-01

  • Leading indicators rise. The Conference Board’s Leading Economic Index (LEI), an aggregate of indicators that tends to lead overall economic activity, rose a strong 0.6% month over month in January, beating the expected 0.4% increase and better than December’s also-strong 0.5% gain. The LEI is now up 2.5% year over year, a rate of change that historically has been accompanied by low risk of recession in the next year.
  • Domestic oil markets in focus. The addition to U.S. supply from shale deposits over the past decade is well known, but demand has changed as well, influenced heavily by our choice of vehicles as well as fuel efficiency standards. President Trump has signed a number of executive orders related to energy, most notably on the Keystone XL Pipeline. However, the administration has not weighed in on other issues, such as fuel economy standards. Any policy changes, as well as how they are enacted, could influence both U.S. supply and demand considerations.
  • European economic growth accelerates. A series of PMI data was released in Europe overnight, pointing to growth increasing at a faster rate than expected. Data from the two largest countries, France and Germany, were better than expected. The Eurozone composite reading (including services and manufacturing) registered 56, the highest reading in 70 months. Inflation in France remained contained at 1.3%, though many in Europe believe that the stronger economy will lead to higher inflation data in the near future.
  • More new highs. Equities staged a late-day rally on Friday to close at new record highs. In fact, the S&P 500 closed at its ninth record high for 2017. This is halfway to the 18 from 2016 and nearly to the 10 record highs made during 2015. Although no one knows how many more new highs will be made this year, it is important to note that they tend to happen in clusters potentially lasting decades. Going back to the Great Depression[1], there have been two long clusters of new highs – from 1954 to 1968 and from 1980 to 2000. The years in between were marked by secular bear markets and a lack of new highs. Could the current streak of new highs that started in 2013 last for many more years?
  • Four in a row. The S&P 500 gained 1.5% last week, closing higher for the fourth consecutive week for the first time since July 2016. The last time it made it to five weeks in a row was coming off of the February 2016 lows. Of the last 12 times the S&P 500 has been up four consecutive weeks, 10 of those times it has closed even higher two weeks later, so momentum can continue in the near term. The S&P 500 has been up only 3.5% in the current streak – the weakest four-week win streak in nearly five years. Going back to 1990, when the S&P 500 is up four weeks in a row, but with a total gain less than 4%, the average return the following two weeks is twice as strong (1.0% versus 0.5%) as the average return after all four-week win streaks.

MonitoringWeek_header

Tuesday

  • Markit Mfg. PMI (Feb)
  • Harker (Hawk)
  • Kashkari (Dove)
  • Eurozone: Markit PMI (Feb)
  • China: Property Prices (Jan)

 Wednesday

  • Existing Home Sales (Jan)
  • FOMC Minutes
  • Germany: Ifo (Feb)
  • OPEC Technical Meeting in Vienna
  • Brazil: Central Bank Meeting (Rate Cut Expected)

 Friday

  • New Home Sales (Jan)

 

 

 

 

 

 

 

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

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. 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.

FOMC Raises Rates By 25 BPS As Expected, But Now Sees 3 Hikes Instead of 2 in 2017

As was expected, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), decided to raise rates by 0.25% (25 basis points) at the conclusion of its two-day meeting. The move had been fully priced into financial markets for the past month or so. This is the second rate hike in this cycle. The first was a year ago in December 2015. Here is a side by side comparison of the statement released today versus the statement released at the last FOMC meeting on November 2, 2016. The big story in today’s meeting is that the FOMC now expects to raise rates three times next year; at the September 2016 FOMC meeting, the Fed expected just two hikes in 2017, and the market and the Fed were aligned on that assessment before today.

In its statement, the FOMC made few changes to its assessment of the labor market, the overall economy, household spending, and business capital spending relative to November, but meaningfully upgraded its view of the labor market. For the second straight meeting, the FOMC sounded a bit more concerned about inflation, noting that “Inflation has increased since earlier this year.” In addition, the FOMC said that “Market-based measures of inflation compensation have moved up considerably.” As it did in November, the FOMC highlighted that the “near-term risks to the economy are roughly balanced,” and the statement again mentioned the committee would “monitor inflation indicators and global economic and financial developments,” a phrase that has been in every FOMC statement this year.

As it has for a year, the FOMC noted that it expects the pace of rate hikes to be gradual and that any future hikes are data dependent and not on a preset course.

The Fed also released a new set of economic forecasts and dot plots at today’s meeting, as it does four times a year. The key takeaways here are that FOMC members now think the Fed will hike rates three times in 2017, down from two hikes embedded in the September 2016 dot plots. The FOMC still expects three 25 basis point hikes in 2018 and 2019, as it did in September. The long run fed funds rate—what the Fed would consider neutral—rose from 2.875% in the September 2016 dot plots to 3.125% today. This is the first time in nearly five years that the Fed has moved up its assessment of the long-run fed funds rate. Fed Chair Janet Yellen was conducting her fourth and final press conference of the year as this blog was being prepared.

As of now, Fed speakers are not scheduled between now and year-end. The minutes of today’s FOMC meeting will be released on Wednesday, January 4, 2017, and the Beige Book for the next (January 31-February 1, 2017) FOMC meeting is due out on Wednesday, January 18, 2017. President-elect Donald Trump’s State of the Union Address in late January/early February will be of keen interest to the Fed and Fed watchers. In addition, the mid-February 2017 appearance by Yellen before Congress for her semiannual monetary policy testimony will provide the market with insight into the Fed’s views on any specifics on fiscal policy provided by the incoming Trump Administration and Congress in early 2017. The interaction between fiscal and monetary policy in 2017 is a key concern for markets.

Click here to view the FOMC schedule for 2017.

 

 

 

 

 

 

IMPORTANT DISCLOSURES: 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. Basis Points are a unit relating to interest rates that is equal to 1/100th of a percentage point. It is frequently but not exclusively used to express differences in interest rates of less than 1%. The Beige Book is a commonly used name for the Fed report called the Summary of Commentary on Current Economic Conditions by Federal Reserve District. It is published just before the FOMC meeting on interest rates and is used to inform the members on changes in the economy since the last meeting. Monetary policy is the process through which the monetary authority (central bank, currency board, or other regulatory committee) of a country controls the size and rate of growth of the money supply, which in turn affects interest rates. The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal Reserve Banks rotate their service in one-year terms. This research material has been prepared by LPL Financial LLC.

Market Update: November 21, 2016

© Provided by CNBC

MarketUpdate_header

  • Stocks higher to begin holiday-shortened week. Equity markets are modestly positive this morning after gaining for the second week in a row; though the S&P 500, Dow, and Nasdaq each fell 0.2% on Friday. The healthcare sector (-1.1%) underperformed, led lower by biotech, while no other sector moved by more than 0.5%. Overseas, both the Nikkei and the Shanghai Composite advanced 0.8% overnight, while European markets are ticking higher in afternoon trading. Elsewhere, last week’s strength in crude oil ($47.65/barrel) has carried over as the commodity is up another 2.8% ahead of next week’s official OPEC meeting in Vienna, COMEX gold ($1214/oz.) is up 0.4%, and the yield on the 10-year Treasury is a couple of basis points lower after finishing the week at 2.34%, its highest close in over a year.

MacroView_header

  • Final earnings push to the finish line. With just a couple dozen S&P 500 companies left to report Q3 2016 results, Thomson-tracked earnings for the index are tracking to a 4.2% year-over-year gain, representing a 5% upside surprise. Excluding the energy sector’s earnings declines, earnings on pace for a solid 7.5% year-over-year gain. As impressive as the Q3 upside has been, the minimal 0.8% drop in estimates since October 1 for the next four quarters, including a small increase over the past week, has been particularly noteworthy and we think bodes well for the next two or three quarters.

earnings-dashboard-11-21-16

  • Another weekly gain for the S&P 500. The S&P 500 gained 0.8% for the week last week, but what is more worthwhile is it did this after gaining more than 3% the week before. Incredibly, this is now 10 consecutive times that the week after a 3% gain was green. Leading the way again were small caps and mid caps, as both the Russell 2000 and S&P 400 Midcap indexes closed at new all-time highs on Friday. The Russell 2000 is now up 11 consecutive days for the longest winning streak since 12 in a row back in 2003.
  • Holiday shopping preview. Although the market’s attention has been squarely on the election for the past several weeks, we should not forget how important this time of year is for the U.S. economy. Consumers are in good shape, with low financial obligations, steady job and wage gains, and high consumer sentiment measures. This, along with retailers’ back-to-school shopping increases and the solid stock market performance in 2016, suggest the National Retail Federation’s 3.6% forecast for year-over-year holiday sales growth may be doable. We do not necessarily expect these sales gains to translate into outperformance for the consumer sectors, but we do not expect them to spook markets.
  • Housing, manufacturing, and the consumer in focus this week as investors await the OPEC meeting. While a high-level OPEC meeting is set for Monday and Tuesday this week, the official OPEC meeting in Vienna isn’t until November 30. Until then, investors will digest Black Friday sales figures, which have become much less important in recent years, along with data on home sales, durable goods orders, and the Markit Purchasing Managers’ Index (PMI) for manufacturing. The Federal Reserve Bank (Fed) will release the minutes of its November 1-2, 2016 meeting this week as well. Other than the key German IFO data for November, it’s a fairly quiet week for international events and data, aside from a speech by European Central Bank (ECB)President Mario Draghi early in the week.
  • Welcome to Thanksgiving week. Historically the week of Thanksgiving has had a slight bullish bias, as do most trading days around major holidays. Over the past 20 years, the average return during the week of Thanksgiving for the S&P 500 has been 0.8%, positive 65% of the time (13 out of 20). Looking at the day-by-day performance, Monday has the best average return, up 0.5%, although Wednesday has been higher more often, 70% of the time. Surprisingly, the best Thanksgiving week over that timespan was 2008, when all four days were green and the S&P gained 12.0%. The worst? All four days in 2011 were red and the index fell 4.7%.

MonitoringWeek_header

Monday

  • OPEC Meeting in Vienna
  • ECB’s Draghi Speaks in Strasbourg

Tuesday

  • OPEC Meeting in Vienna

Wednesday

  • Durable Goods Orders and Shipments (Oct)
  • Markit Mfg. PMI (Nov)
  • FOMC Minutes
  • Eurozone: Markit Mfg. PMI (Nov)
  • Japan: Nikkei Mfg. PMI (Nov)

Thursday

  • Germany: Ifo

Friday

  • Advance Report on Goods Trade Balance (Oct)

 

 

 

 

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 14, 2016

© Provided by CNBC

MarketUpdate_header

  • Stocks near flat as bond yields continue to rise. U.S. markets are little changed in early trading, though the bond market continues to make waves as the yield on the 10-year Note (2.25%) is up another 10 basis points from Friday’s close. Last week saw the S&P 500 post its largest weekly gain in more than two years (+3.8%) with the heavily-weighted financial sector leading the way, up 11.4%; rate-sensitive utilities, consumer staples, telecom, and real estate all closed lower on the week. Asian markets were mixed overnight; Japan’s Nikkei (+1.7%) climbed following a better than expected Q3 gross domestic product (GDP) release, while the Hang Seng lost 1.4%. European markets are mostly higher in the afternoon session, though they have pulled back from earlier levels alongside a drop in oil, which is down 1.2% to $42.90/barrel as supply concerns weigh on the price. Finally, COMEX gold ($1211/oz.) continues to sell off and the dollar index (+1.0%) has carried over last week’s momentum, approaching two-year highs.

MacroView_header

  • Earnings recession ending with a bang. Corporate America is delivering a strong end to earnings recession, with the S&P 500 tracking to a 4.1% year-over-year earnings increase (approximately 7.4% excluding the energy sector). The 71% beat rate has led to a roughly 5% upside surprise to prior (October 1, 2016) estimates. S&P 500 earnings estimates for the next four quarters, which dipped just 0.1% over the past week, have continued to hold up well during earnings season, losing slightly more than 1%. Look for more from us on earnings in the upcoming weeks in our Corporate Beige Book and Outlook 2017.

earnings-season-dashboard

  • What a week. Last week was historic on many levels. Among the highlights: the S&P 500 gained 3.8% for its best week since October 2014, the Dow gained 5.4% for its best week since December 2011, bonds were hit very hard as the 10-year yield spiked 21% (the most ever, using reliable data going back 50 years), the CBOE Volatility Index (VIX) had its third-largest weekly drop ever (down 37%), biotech had its best week in seven years, small caps gained more than 10%, microcaps did even better by adding 12%, and financials tacked on 11% – their best week since May 2009. We are not surprised that stocks recovered from the initial post-election selloff; but rather how swiftly. There were several factors behind the sharp turnaround, including the certainty of the outcome, optimism regarding a peaceful transition, anticipation of market-friendly policies, and negative investor sentiment heading into the election.
  • Post-election standouts include financials, healthcare and industrials. The outlooks for financials, healthcare, and industrials appear to have brightened meaningfully and energy and small caps may get a boost. The near-term may continue to be volatile for emerging markets, though we maintain our positive intermediate-to-long-term view on that asset class amid attractive valuations, earnings stabilization, and expected moderation of Trump’s views on foreign trade. Look for more on potential election impacts in our Outlook 2017, due out later this month.
  • Japanese GDP upside surprise. Japanese Q3 economic growth was much higher than expected, increasing 2.2% on an annualized basis, compared to expectations of a 0.8% increase. Trade was the surprising variable, with exports higher and imports lower than expected. While this is good news for the economy overall, data from key sectors like business and consumer spending were largely consistent with expectations. That data, combined with measures of inflation also released, suggest that internal Japanese demand remains relatively weak, despite the better GDP headline.
  • Chinese economic data was slightly weaker than expected, and flat over previous releases. China released industrial production and retail sales overnight. Industrial production grew at 6.1% year over year, slightly less than the 6.2% increase expected. Consumer spending increased 10% year over year, a good gain on an absolute basis, but still below the 10.7% expected. Overall, the data from China continue to show stabilization in the economy, but there is much work to do as the government attempts to guide the economy from an industrial and export orientation toward a more consumer-oriented consumer economy.
  • Key data on inflation, housing, manufacturing, and the consumer along with Fed Chair Yellen in the week ahead. Late last week, Federal Reserve Bank (Fed) Chair Janet Yellen added a last minute appearance before the Joint Economic Committee of Congress for November 17, and that appearance is the key to this week’s calendar. Data on inflation, housing, manufacturing, and consumer spending will also draw plenty of attention. In addition to Yellen, there are more than a dozen other Fed speakers on the docket this week, presumably preparing markets for a December rate hike. Overseas, key data on GDP (Japan) and industrial production and retail sales (China) were released over the weekend, while later in the week a key speech from European Central Bank (ECB) President Draghi and data on GDP (Eurozone), ZEW (Germany) and CPI (UK) are on tap.

MonitoringWeek_header

Monday

  • Kaplan (Hawk)
  • Lacker (Hawk)

Tuesday

  • Retail Sales (Oct)
  • Empire State Manufacturing Report (Nov)
  • Fischer (Hawk)
  • Germany: ZEW (Nov)
  • Eurozone: GDP (Q3)

Wednesday

  • NAHB Housing Market Index (Nov)
  • Bullard (Hawk)

Thursday

  • Housing Starts and Building Permits (Oct)
  • Yellen (Dove)
  • Mexico: Central Bank Meeting (Rate hike expected)
  • China: Property Prices (Oct)

Friday

  • Leading Indicators (Oct)
  • George (Hawk)
  • ECB’s Draghio speaks in Frankfurt
  • APEC Leaders Summit in Peru

 

 

 

 

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.

Obama, Fed Chair Yellen Discuss Outlook for Economy

© Carlos Barria / Reuters
© Carlos Barria / Reuters

WASHINGTON — With the U.S. economy improving, President Barack Obama and Federal Reserve Chair Janet Yellen discussed the outlook for near and long-term economic growth during a Monday afternoon meeting in the Oval Office, the White House said.

Obama and Yellen also talked about the state of the labor market, inequality and potential risks to the economy, both in the U.S. and globally. They also reviewed steps taken during the Obama administration to strengthen the financial system and protect consumers, the White House said of the private meeting.

White House spokesman Josh Earnest said both Obama and Yellen are focused on ways to expand economic opportunities for the U.S. middle class. Earnest called the meeting an opportunity for the two to “trade notes” while emphasizing that Yellen makes decisions about monetary policy independently.

Yellen has recently noted that the U.S. job market and housing recovery have lifted the economy close to full health despite the risks that remain, including a global economic slump.

The president occasionally meets with the Fed chair to discuss the state of the economy. The last such meeting was in November 2014.

“The president has been pleased with the way that she has fulfilled what is a critically important job,” Earnest said. He added that Obama has “the upmost respect for the independent nature of her role.”

Yellen has also met with Obama on two occasions to discuss the progress being made in implementing the sweeping overhaul of banking regulations that Congress passed following the 2008 financial crisis. Those meetings, which included other federal bank regulators, occurred on March 7 of this year and on Oct. 6, 2014.

Written by Associated Press

Is Janet Yellen Blind to the Rebound in Inflation?

Is Janet Yellen blind to the rebound in inflation?
Provided by MarketWatch

The U.S. economy, by all indications, is near full employment, and, according to the inflation hawks, that means inflation rates should start rising again.

In fact, the hawks say, inflation is already bubbling, and, if Janet Yellen doesn’t cool things fast, inflation will be at a full boil. Very soon, the hawks say, the inflation rate will exceed 2%, which is the Federal Reserve’s target rate.

Inflation has been below 2% for four years, which is one reason the Fed is keeping money so easy. Most Fed officials don’t think inflation will get back to 2% on a sustainable basis for two more years.

But the data are troubling. Six months ago, inflation barely had a pulse, rising at just 0.2% year-over-year. But now the personal consumption expenditure price index (the Fed’s preferred measure of inflation) is at 1.25%, even as energy prices continue to drop.

What’s behind this recent uptick in inflation? One theory is that we have too many jobs. That is, economic theory suggests that when the unemployment rate gets very low, workers gain bargaining power and are able to command higher wages because the demand for labor is higher than the supply. Bosses must raise wages to keep good workers, and then they must raise their selling prices in order to pay those wages.

This relationship is known as the Philips Curve, and it’s been the main theory behind the Fed’s monetary policy for more than 50 years: The Fed tries to keep the unemployment rate just above the level that would fuel inflation. That level is known as the nonaccelerating inflation rate of unemployment, or NAIRU.

There’s only one problem. Although the theory seems quite reasonable on a chalkboard, the empirical evidence shows that it doesn’t work in the real world. NAIRU seems to change over time. Sometimes it seems that NAIRU is above 6%. But right now, NAIRU seems to be below 5%. It could be below 3%. Recent research cited by the Council of Economic Advisers suggests NAIRU could be zero. No one really knows. And no one has a better theory to explain inflation.

So far, Fed officials are doing what seems most practical: They are letting the economy run. Before they feel obligated to slam on the brakes, they’ll want actual evidence of higher prices and higher wages. They’ll cautiously raise rates away from zero but maintain accommodative policy for a while longer, especially with risks of global contagion rising.

But what about the spike in the PCE price index in the past few months? Surely that indicates that NAIRU has been breached! Isn’t it time to get serious about raising rates?

Fed Chairwoman Janet Yellen was asked about that at her latest press conference on Wednesday and she said she wasn’t convinced.

“Given that the economy is now close to our maximum employment objective, hopefully inflation is moving up,” Yellen said, before switching to the other hand. “As you mention, recent readings on inflation have moved up. There may be some, you know, I want to warn that there may be some transitory factors that are influencing that.”

In other words, just as transitory declines in oil prices and the one-time strengthening of the dollar have pushed the PCE price index far below the Fed’s target, transitory increases in other prices are now pushing the index higher. But Yellen doesn’t think it’ll last, in either case. Oil prices and the dollar will stabilize, and the transitory price increases seen over the past few months will also fade away.

Now, this may seem like cherry picking the data: Yellen picks which prices matter to her, and disregards the rest. But there is a method to her madness.

Remember, inflation is a general and sustained increase in prices, not just temporary increases or decreases for a few goods and services. What the Fed cares about, what we care about, is the pace of underlying inflation. Transitory spikes or dips aren’t generalized inflation; that’s just the markets working out the ebbs and flows of supply and demand.

Economists have a lot of tools to help them figure out whether the underlying rate of inflation has changed or whether it’s just temporary factors. One method is to use core inflation measures, which automatically ignore volatile food and energy prices. Core inflation does a pretty good job of predicting future inflation rates, but it offends people who think food and energy prices matter in the real world.

Another method has been devised by the Dallas Fed. Its trimmed mean PCE index strips out whatever prices are rising or falling most in a given month, ignoring the outliers on the theory that the biggest price changes are reactions to shocks in individual markets, not part of a general trend.

Researchers at the Dallas Fed point out that the recent spike in the PCE index has been driven by unusually large price increases for goods such as apparel, jewelry, motor vehicles, and drugs, and for services such as air fares, school lunches, tickets for spectator sports and banking fees.

Apparel prices, for instance, are up at a 14% annual rate in the first two months of the year, compared with a 0.9% decrease in 2015. Jewelry and watch prices are up at a 62% annual rate, compared with a 0.7% drop in 2015. Motor vehicle prices are up at a 3.2% rate, compared with a 0.2% rise last year. Drug prices are up at an 11.5% rate, compared with a 1.7% increase last year.

Most likely, the recent spike in the PCE index is due to temporary shocks, not to an acceleration in underlying inflation. There’s no urgency to raise rates on account of hyperinflation lurking right around the corner. In reality, the Fed would be ecstatic if it could get inflation back to 2% any time soon.

Written by Rex Nutting of MarketWatch

(Source: MarketWatch)

 

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