Market Update: January 17, 2017

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  • U.S. markets begin week lower. Stocks opened on a weak note this morning despite upbeat results from Morgan Stanley and United Health. Markets were closed yesterday for the holiday, but the Dow ended flat on Friday while the S&P 500 (+0.2%) and Nasdaq (+0.5%) posted modest gains. S&P sector movements were also muted, driven largely by a rebound in interest rates, as financials (+0.6%) was the best performer and real estate (-0.3%) the worst. Overseas Monday night, the Nikkei shed over 1.5%, dropping to a new low on the year, while the Shanghai Composite (+0.2%) posted a minor gain. European shares are mixed in afternoon trading, although comments from Prime Minister Theresa May have boosted the British pound and lowered the FTSE 100 by 1%. Elsewhere, WTI crude oil ($52.76/barrel) is up 0.7%, COMEX gold ($1214/oz.) is up 1.5% on precious metals demand, and the yield on the 10-year Treasury note is down to 2.33%.

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  • Treasury yields move higher through Thursday but finish the week flat. Treasury yields fluctuated on the week with the yield on the 10-year note starting and ending the week just under 2.4%. Prices moved higher based on the success of Wednesday’s $20 billion 10-year Treasury auction, which saw foreign buyers (indirect bidders) buy 70.5% of the auction. Friday opened weaker as Thursday’s $12 billion 30-year auction was not as well received as the 10-year auction, but foreign participation was still significant at 66.7%.
  • Yield curve steepens for week. The 2-year Treasury fell by 1 basis point to 1.21%, while the 10-year finished the week unchanged. This brings the 2-year/10-year slope, a measure of the steepness of the yield curve to 121 basis points (1.21%), higher on the week by 1 basis point (0.01%). A steeper, more positive yield curve generally indicates that the market anticipates higher interest rates and more growth. As such, investors require more yield as they move longer on the yield curve. The 2-year/30-year steepness was also wider on the week by 4 basis points (0.04%) to 180 basis points (1.80%).
  • Inflation expectations remain range bound near 2%. Inflation expectations ticked up slightly from 1.95% on Monday to 1.99% on Friday. This is near the highest reading year-to-date, however the number has yet to hold above the Federal Reserve Bank’s 2% target. We continue to monitor oil prices, which could drive headline inflation above 2% over the course of the year.
  • Municipals outperformed U.S. Treasuries on the week. Municipal bonds, as measured by the Barclays Municipal Bond Index, outperformed U.S. Treasuries as measured by the Barclays US Treasury Index on the week. The 10-year muni finished the week lower in yield by 5 basis points (0.05%) to 2.28%, down from 2.33% on Monday. The longer 30-year maturity also finished lower in yield by 5 basis points. Declining municipal yields led to 10-year and 30-year AAA municipal to Treasury ratios that are on the expensive side of their recent range, finishing the week at 93% and 99%, respectively.
  • High-yield spread holds below the 4% level. High-yield spreads ended the week just below 4% as measured by the Barclays High Yield Index. The additional yield offered by high yield bonds remains attractive in a low-yield environment, though high-yield spreads are pricing in a lot of good news, leaving less room for error for the asset class.
  • Preferred stocks rebound. Positive earnings expectations for financials (which are heavy issuers of preferred stocks) and lower rates helped the Merrill Lynch Preferred Stock Hybrid Index continue its recent uptrend last week, returning 0.7% to beat the Barclay’s U.S. Aggregate Bond Index by 0.5%. Year-to-date, preferreds, as measured by the index have returned 2.6%, regaining some strength after a weak fourth quarter that returned -4.6%.
  • Manufacturing still moving higher. Aided by a turnaround in oil production, a relatively stable dollar, and better economic performance overseas, manufacturing began to stabilize at midyear 2016, and over the past few months, the data suggest some modest reacceleration. The January 2017 readings on the Empire State (+7) manufacturing survey matched expectations and the December 2016 reading. The readings on the Empire State Manufacturing Index in the past few months were the highest in nearly two years. Although manufacturing accounts for less than 20% of economic activity and employment in the U.S., it has a much larger impact on S&P 500 earnings, and therefore, equity markets.
  • Is small cap strength sustainable? Small caps have surged since Election Day, with the Russell 2000 Index outperforming the large cap S&P 500 by 8.5% since November 8, 2016. Given the magnitude of small cap outperformance, investors with previously established small cap stock allocations may want to consider waiting for a dip before adding to positions. The relative strength has been driven by several election-related factors, including prospects for tax reform, deregulation, and President-elect Trump’s focus on encouraging U.S. manufacturing.
  • First busy week of earnings on tap. With results from 29 companies in the books, S&P 500 earnings growth is tracking to 6.2%, driven by financials and technology. The earnings beat rate is a solid 72%, while revenue results have brought more misses than hits so far with a beat rate of 34%. Another 34 companies report this week (January 17-20), dominated by financials and industrials.

011717_earningsdashboard-01

  • How slow is slow? Going back to 1950, the +7.8% rally in the Dow from the Election through year end was the third-strongest rally ever. Yet, over the past month the Dow has held close to the 20,000 level, unable to break above. At the same time, it isn’t selling off either – instead trapped in an incredibly tight range. In fact, using closing prices back to 1900, the Dow has traded in a range of only 1.07% over the past 21 trading days, which is the tightest monthly range ever. Looking at reliable intraday data going back to 1970, the range over the past month has been only 1.42% – again the smallest monthly range ever. Lastly, this is so rare because the Dow has closed within 1.5% of its all-time high for 45 consecutive days – one of the 10-longest such streaks ever.

MonitoringWeek_header

Tuesday

  • Empire State Manufacturing Report (Jan)
  • Dudley* (Dove)
  • Germany: ZEW Survey (Jan)
  • World Economic Forum begins at Davos, Switzerland

Wednesday

  • CPI (Dec)
  • Kashkari* (Dove)
  • Yellen* (Dove)
  • China: Property Prices (Dec)

Thursday

  • Philadelphia Fed Index (Jan)
  • Yellen* (Dove)
  • Eurozone: European Central Bank Meeting (No Change Expected)
  • China: GDP (Q4)
  • China: Industrial Production (Dec)
  • China: Retail Sales (Dec)
  • China: Fixed Asset Investment (Dec)

Friday

  • Inauguration Day
  • Harker* (Hawk)
  • U.K.: Retail Sales (Dec)

 

 

 

 

 

 

 

 

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

Market Update: January 3, 2017

© Provided by CNBC

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.

Why We Think Munis are Offering a Buying Opportunity Now

Municipal bond prices have taken a beating lately and I don’t believe that the downward move is justified. As Jon Rocafort of Eaton Vance points out in his blog post below, this might be a great buying opportunity!

 

Jon Rocafort, Co-Director of SMA Strategies at Eaton Vance

We think the extreme move in the municipal bond market after the U.S. election may offer an attractive entry point for investors.

Let’s start with some historical context on the recent spike in muni yields, which has sent bond prices lower. The BofA Merrill Lynch Municipal Master Index lost 3.7% in November, its largest one-month decline since 2008. Zooming out a bit, we have witnessed one of the largest five-month increases in yields on record.

Our view is that this historic move has created an emerging opportunity to lock in higher yields and potentially generate higher future returns. For investors lamenting the “sticker shock” of low muni yields recently, this could be their chance to enter the sector or add to existing holdings.

The chart below illustrates the resilience of the municipal market and demonstrates that sharp increases in municipal yields have created buying opportunities and rewarded investors with strong returns in subsequent months. Although as always, past performance is no guarantee of future results.

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The noticeable yield upswings in 2008, 2010 and 2013 all offered investors the chance to buy munis at not only higher yields, but also at attractive valuations. For example, the 2010 scare was driven by analyst Meredith Whitney’s prediction of hundreds of billions of dollars of muni defaults – that never materialized. Also, during the 2013 “Taper Tantrum” both Treasury and municipal yields rose sharply after the Federal Reserve said it would start slowing its bond purchases.

We may be witnessing another overreaction in the bond market. Many of Donald Trump’s plans, including tax cuts and fiscal stimulus, would come with very high price tags and likely be challenged by fiscal hawks in Congress. At this point, it’s extremely difficult to predict what will actually be passed, in what form, and over what horizon. In our view, the “Trump rally” in stocks and the sell-off in bonds are based on very little detail on the President-elect’s policy initiatives, and seems driven more by speculation.

And even if the Trump administration succeeds in reducing personal income tax rates, muni yields still look attractive. First, the ratio of 10-year AAA muni yields versus 10-year U.S. Treasury yields has risen from 93% before the election to about 105% (higher ratios indicate cheaper muni valuations). Also, as we have discussed recently in a separate blog, historical changes in the highest marginal tax bracket have not had a material impact on the relative valuation of muni bonds over the medium to long term.

Bottom line: Treasury and municipal bond yields have seen an extreme short-term reaction after the U.S. election. It is surprising what has taken place without more actual detail. The move could be an overreaction that gives investors a chance to scale into munis at higher yields and cheaper valuations – an opportunity similar to what developed following 2008, 2010 and 2013.

 

 

 

 

 

An imbalance in supply and demand in the municipal market may result in valuation uncertainties and greater volatility, less liquidity, widening credit spreads and a lack of price transparency in the market. There generally is limited public information about municipal issuers. As interest rates rise, the value of certain income investments is likely to decline. Rising interest rates could reduce the value of the bonds in the portfolio, thus adversely affecting the value of the overall investment.

Source: Eaton Vance

Does a Trump Presidency Put Municipal Bond Tax Exemption At Risk?

President-elect Trump has called for increased spending to rebuild infrastructure. This, coupled with calls for tax reform, has municipal bondholders nervous that the federal government will limit or end the tax exemption on their bonds as a way to partially pay for this program. Although possible, we do not believe this is probable for the following reasons.

Municipal bonds have long been the primary financing vehicle for infrastructure spending in the United States. The federal government has stayed largely out of the process, allowing states to price their own deals. The belief has been that this lowers net interest cost as it is more efficient to finance on the local level. Although the federal government could use the revenue, we think that ending the municipal bond tax exemption could lead to court challenges. While tied up in court, new projects might be delayed or canceled, leading to pressure on politicians. This, coupled with the increased borrowing costs as investors demand more yield for the volatility, would diminish the benefit of new revenues collected from municipal bonds.

Another reason we do not see this as probable is the negative impact on the largest buyer, the retail investor. According to the Securities Industry and Financial Markets Association (SIFMA), more than 40% of municipal bonds, totaling more than $1.6 trillion, are held by individuals. This number increases to 70%, or more than $2.6 trillion, when mutual fund holders (including money market mutual funds) are included. Many holders are elderly and rely on tax-exempt income for retirement. They constitute an active voting group that would be very unhappy with changes to its fixed income payments. In addition, they could seek legal recourse because bond deals were marketed and sold to them as tax-free.

muni-bond-holders

In conclusion, the increased costs associated with restructuring the bonds would likely be prohibitive. And even if a change occurred, the process would take years and the bonds that have already been issued would more than likely be grandfathered. In other words, all bonds issued before the tax changes would likely remain tax exempt, increasing the value of existing municipal portfolios. We will continue to watch this issue as more certainty around the incoming Trump administration’s plan of action emerges.

 

 

 

 

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. Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market. Bonds are subject to market and interest rate risk if sold prior to maturity. Bond and bond mutual fund values and yields will decline as interest rates rise and bonds are subject to availability and change in price. 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. Indices are unmanaged index and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. This research material has been prepared by LPL Financial LLC.

Will Municipal Bond Funds Hit 52 Weeks of Consecutive Inflows?

LPL Financial Research

The Investment Company Institute (ICI) reported yesterday that municipal bond funds saw inflows of $754 million for the time period September 14, 2016, to September 21, 2016, the 51st consecutive week of inflows. Although we won’t know until next Wednesday if the asset class will hit a full year of uninterrupted inflows, the strength of the streak is worth discussing.

As the chart below shows, the current streak is the second longest, and also the second strongest, in the past 10 years. The only one that has been longer started following the financial crisis in 2009 and persisted until March 2010, with an average weekly inflow of $1.35 billion. The current stretch has a slightly lower, but still strong, $1.2 billion in average weekly inflows. It is also interesting to note that some previous streaks would have been much longer, if not for a lone outflow in the middle. Had…

View original post 623 more words

Investment Directions: So What Should I Do With My Money?

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Provided by 401kcalculator

United States

We are underweight U.S. stocks. After its June policy meeting, the Fed signaled that it was getting close to raising short-term interest rates on improving economic conditions and promised to move gradually. Yet turmoil surrounding Greece and China has brought more uncertainty to the global economic outlook, which could give the Fed some pause. To begin with, there is reason to proceed with caution. The latest U.S. readings on jobs and the housing market point to an economic reacceleration in the second half, but soft spots remain. Measures such as retail sales and durable goods continue to show weakness. And, the Chicago Fed National Activity Index (CFNAI), a good leading indicator for the country’s overall economic health, has inched higher but is still running below trend (see the chart below).

Given that valuations of U.S. stocks are relatively pricey, we tend to search abroad for better value and opportunities. But we think U.S. stocks have further upside potential, keeping in mind that mergers and acquisitions just hit a new high in the second quarter. It is still early in the second-quarter earnings season, but with estimates having already been lowered, the U.S. economy recovering and the dollar having stabilized, companies should have an easier time beating estimates this time around.

Turning Insight Into Action

Many measures of U.S. economic activity have improved since the slowdown early in the year. While weakness lingers in some areas, the U.S. economy looks set to regain speed. Selectivity is important in the U.S. market, where value will vary by sector and individual company.

Consider blending opportunities for core market exposure with high- conviction active solutions that focus on finding value in the market.

CONSIDER

iShares Core S&P 500 ETF (IVV), iShares Core S&P Total U.S. Stock Market ETF (ITOT), Basic Value Fund (MABAX)

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International Developed Markets

We hold an overweight to eurozone equities. Uncertainty surrounding Greece and its membership in the euro area will keep risk premiums and volatility elevated; however, we think fallout from the Greek drama will remain contained and short- lived (see Hot Topic on page 7). In fact, with economic data coming roughly in line with forecasts and profit expectations firming, any further volatility in eurozone equities could present an opportunity. This is especially true since the European Central Bank (ECB) is expanding its balance sheet and is poised to provide further monetary accommodation if needed. Any continued euro weakness associated with these events will likely give an additional kick to earnings as profits are repatriated. That said, investors should consider hedging their currency exposure to eurozone equities to avoid returns being eroded by euro weakness.

We are overweight Japanese stocks. Somewhat sheltered from this year’s financial market roller coaster ride, Japanese equities have not only been an island of relative calm and tranquility (see the chart below) but also an area of strong outperformance. Japan’s economy, while certainly not a locomotive, has managed to pull out of a shallow and brief recession and is beginning to show signs of benefiting from a weaker yen. Moreover, Japanese companies have come a long way in improving profitability, and they are also lifting dividends and share buybacks to boost return on equity. Despite outpacing the rest of the developed world so far this year, Japan remains inexpensive based on price-to-book and forward price-to-earnings ratios.

We have a neutral view on developed Asia ex-Japan equities. A setback in Chinese stocks, slower commodities demand growth and negative earnings revisions have weighed on the region’s equity markets this year. However, after the summer selloffs, we think Asia ex-Japan equities warrant a closer look. Take Hong Kong, the Hang Seng Index has very recently regained some lost ground, but not before it fell to the cheapest levels versus the MSCI World Index since September 2003. Also of note are the above-average dividend yields, with Australia yielding north of 4.5%.

Turning Insight Into Action

Earnings growth and valuations of European and Japanese companies are more compelling than for U.S. companies. But renewed strength in the greenback could erode returns in international markets for U.S. dollar- based investors, boosting the allure of currency hedged exposure.

Consider using an active manager with strong stock selection expertise or be selective with index-based exposures.

CONSIDER

Global Long/Short Equity Fund (BDMIX), Global Dividend Fund (BIBDX), Global Allocation Fund (MALOX), iShares MSCI Japan ETF (EWJ), iShares Currency Hedged MSCI Japan ETF (HEWJ), iShares MSCI Eurozone ETF (EZU), iShares Currency Hedged MSCI Eurozone ETF (HEZU), iShares International Select Dividend ETF (IDV)

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Emerging Markets

We hold a benchmark weight to emerging markets. Since topping out at the end of April, emerging markets have entered another correction phase, and the selloff has been quite indiscriminate. While markets have stabilized somewhat very recently, emerging Asia has clearly dominated price action since the end of June. In addition to China’s equity market woes, Latin America has underperformed again so far this year and Eastern Europe sharply declined since mid-May. However, we still prefer emerging Asia. Countries in emerging Asia have greater scope for monetary accommodation and market reforms, will likely experience better growth (though not great), should benefit most from lower oil prices and have increasingly competitive currencies.

We have a neutral weight in China with a preference for H-shares. Chinese stocks tumbled the most in nearly six years in early July after a series of measures (and some quick backtracking) paradoxically aimed at stabilizing financial market conditions backfired. While the slide has paused for now, we expect more volatility, particularly in the onshore exchanges. After downgrading China to neutral in June, we will hold off from chasing newly attractive valuations until the situation stabilizes. That said, it may be possible to find bargains in the Hong Kong-listed H-shares market, which is both cheaper and less volatile than the A-shares market. Select banks, property developers and new energy companies could present value.

It is worth noting, however, this stock turmoil has not affected the Chinese economy. The PBOC has plenty of spare power to support economic growth and financial markets, unlike some developed market central banks, and will likely continue to implement countermeasures. And when it comes down to it, we have not seen a material impact from the equity selloff on the global economy and markets to date.

We elect to downgrade Poland from an overweight to neutral. Poland’s economy is in relatively good shape and profitability is quite strong among Polish companies. However, the financials sector, which represents more than 40% of Poland’s market capitalization, faces the risk of a banking tax and other regulation if a more populist party (the Law and Justice party) comes to power this autumn, as is currently projected. Moreover, Poland no longer stands out as particularly cheap relative to other Eastern European countries, such as Turkey and Russia.

Turning Insight Into Action

It may be time to consider getting back to a benchmark exposure in emerging markets, but investors should remain selective.

Consider accessing specific countries or regions, or use an active manager with expertise to identify potential opportunities.

CONSIDER

iShares MSCI Emerging Markets Asia ETF (EEMA), iShares MSCI Emerging Markets Minimum Volatility ETF (EEMV), Emerging Market Allocation Fund (BEEIX)

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Global Sectors

We are overweight information technology and financials. As the economy firms, loan demand should rise, which could support financials stocks. Mergers and acquisitions as well as securities underwriting business will likely remain solid, which can also prove helpful. And, technology stocks should benefit from more and more companies deciding to replace antiquated technology infrastructure.

We hold a neutral weight to the health care sector. While health care has outperformed by a wide margin this year and is a consensus overweight among money managers, valuations appear reasonable against solid earnings growth and profitability, even for biotechnology stocks. In an environment of decent economic growth, favorable credit conditions and continued good earnings growth, we would anticipate biotech especially, but also life sciences, to outperform. Meanwhile, there are good reasons to consider pharmaceuticals stocks, which tend to have very high dividend payout ratios. This could prove particularly advantageous in a risk-off scenario (defined by a renewed drop in bond yields).

We are underweight U.S. utilities and consumer staples. These sectors outperformed during the past month as heightened global risk aversion prompted a decline in interest rates and a preference for defensive sectors. But while defensives may be somewhat less expensive after this year’s repricing, any stabilization from here could entail further downside.

We have a neutral exposure to the energy sector as oil prices have declined anew in recent weeks. We prefer integrated oil and gas companies given their more muted sensitivity to oil prices in the past. What is more, their refinery businesses benefit from lower oil prices.

We are neutral in industrials. The correction in transportation stocks has investors worried that the decline may be a harbinger of bad news for the broader market. We think the decline in transports has more to do with the subsector’s overvaluation after two years of strong outperformance. Plus, declining global trade volumes, weaker-than-forecast economic activity and reduced demand for coal shipments all play a role in the subsector’s recent outsized move lower.

Turning Insight Into Action

Consider cyclical sectors over defensive and dividend-oriented sectors. Consumer staples and U.S. utilities look particularly unattractive and are vulnerable to rising rates.

Look into possible opportunities in the technology and financials sectors and consider a long/short approach to potentially benefit from any continued market volatility.

CONSIDER

iShares Global Financials ETF (IXG), iShares Global Tech ETF (IXN), iShares U.S. Technology ETF (IYW), Global Long/Short Equity Fund (BDMIX)

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Fixed Income

We are underweight Treasuries. Yields of long-term debt in the United States, Germany, United Kingdom and Japan hit their highest levels this year in June, but the upward movement was interrupted, at least temporarily, by jitters about Greece and China near month-end. Rate volatility is likely to remain elevated as markets wrestle with the timing of the Fed’s liftoff. We believe yields could climb higher over the course of the year, although much of the adjustment may have already taken place.

We hold a neutral position in Treasury Inflation-Protected Securities (TIPS). The backup in yields has returned some value to the asset class. We don’t think inflation will accelerate meaningfully anytime soon, but headline inflation and expectations have inched higher while the risk of disinflation has decreased.

We are overweight high yield. Outflows from the asset class continue and spreads are under pressure. Although volatility could persist, yields are attractive in both absolute and relative terms, and fundamentals remain encouraging.

We have an overweight in municipals. The municipal market had another negative month in June, though it performed better than the more volatile Treasuries. Puerto Rico’s debt woes grabbed headlines but had little price impact thus far on the overall muni market (see the chart below). Fundamentals of the majority of the muni market remain intact, as we anticipate minimal contagion risk. That said, if restructuring negotiations between the commonwealth and its bondholders turn contentious and drag on, this could stoke volatility for the broader market.

We are underweight in non-U.S. developed markets and neutral in emerging- market debt. Increased volatility in interest rates and risk assets, as well as the possibility of the dollar resuming its climb, could prove difficult for hard currency- denominated emerging-market debt.

We hold a benchmark weight in mortgage-backed securities (MBS). While MBS held up relatively well in the interest rate backup, mortgage spreads relative to Treasuries remain low and valuations do not suggest an attractive entry level yet.

Turning Insight Into Action

With interest rates likely to rise in the United States in 2015, fixed income investors will likely face challenges yet again this year.

Manage Interest Rate Duration

Consider a flexible strategy with the ability to actively manage duration.

CONSIDER

Strategic Income Opportunities Fund (BSIIX), Strategic Municipal Opportunities Fund (MAMTX), Global Long/Short Credit Fund (BGCIX)

Manage Interest Rate Risk

Seek to reduce interest rate risk through time by using a diversified bond ladder and matching term maturity to specific investing needs.

CONSIDER

iBonds® ETFs

Seek Income

Cast a wider net for income while carefully balancing the trade-offs between yield and risk.

CONSIDER

Multi-Asset Income Fund (BIICX), High Yield Bond Fund (BHYIX), iShares iBoxx $ High Yield Corporate Bond ETF (HYG), iShares iBoxx $ Investment Grade Corporate Bond ETF (LQD)

Build a Diversified Core

Consider using core bonds for potential diversification benefits and protection from unforeseen shocks to equity markets.

CONSIDER

Total Return Fund (MAHQX), iShares Core U.S. Aggregate Bond ETF (AGG), iShares Core Total USD Bond Market ETF (IUSB)

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For the full report, please click on the source link below.

Written by Russ Koesterich of BlackRock

(Source: BlackRock)

Puerto Rico Loses Bid for Restructuring Law as Crisis Mounts

© AP Photo/Ricardo Arduengo
© AP Photo/Ricardo Arduengo

Puerto Rico lost its bid to revive a restructuring law that investors argued conflicts with U.S. bankruptcy code, a blow to the commonwealth as it falls deeper into a fiscal crisis.

Lawyers for Puerto Rico officials had asked the U.S. Court of Appeals in Boston to reinstate the local law to help it deal with $72 billion in debt. The court resisted, agreeing instead with a San Juan judge who threw out the statute in February.

The dispute centers on whether the island, which is excluded from federal bankruptcy code regarding municipal entities, can make its own rules for allowing public agencies to seek protection from creditors.

The commonwealth may seek a rehearing before the three- judge panel or a larger group of judges at the Boston-based court. It can also seek to be heard by the U.S. Supreme Court. Puerto Rico can also turn to Congress and request permission to put its agencies in bankruptcy, the appeals court said.

“In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s case,” the appeals court said in a majority decision on Monday. “We must respect Congress’s decision to retain this authority.”

No Choice?

Barring help from federal lawmakers, the decision means the debt-burdened Puerto Rico agencies will have no other choice except to continue piecemeal negotiations with creditors, a process which could lead to chaos if discussions break down and investors end up suing the agencies and each other to reclaim some of what they’re owed.

Puerto Rico securities have dropped in prices after Governor Alejandro Garcia Padilla last month said he would move toward restructuring the island’s debt. Commonwealth general obligations maturing July 2035 traded Monday at an average price of 70.6 cents on the dollar, after falling to 66.6 cents on the dollar June 30, a record low, according to data compiled by Bloomberg.

The case is Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 15-1218, U.S. Court of Appeals for the First Circuit (Boston).

Written by Christie Smythe of Bloomberg 

(Source: MSN)

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