Market Update: April 24, 2017

MarketUpdate_header

  • U.S. up, Europe surging in wake of French vote. U.S. equities are tracking global markets higher this morning following yesterday’s first round of the French presidential elections in which Emmanuel Macron and Marine Le Pen finished in the top spots, triggering a run-off vote set for May 7. Friday’s session concluded with the major indexes posting modest losses ahead of the vote, as the S&P 500 (-0.3%) was led lower by the telecom (-1.6%) and financials (-0.9%) sectors, with only utilities (+0.5%) and industrials (+0.1%) finishing positive. Overseas, Asian indexes reacted positively to the French election as the Nikkei (+1.4%) and Hang Seng (+0.4%) gapped higher; the notable exception was the Shanghai Composite (-1.4%), which fell amidst a government crackdown on leverage. European indexes are spiking as the STOXX 600 (+1.8%) benefits from investors betting on the pro-E.U. candidate Macron; Frances’s CAC is up more than 4% to its highest level in nine years. Finally, the yield on the 10-year Treasury has jumped to 2.30%, WTI crude oil (-0.5%) is just below $50/barrel, and COMEX gold ($1271/oz.) has dropped 1.4%.

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  • Solid start to Q1 earnings season. With 95 S&P 500 companies having reported, Thomson-tracked S&P 500 earnings for first quarter 2017 point to an 11.2% year-over-year increase, compared with consensus estimates of +10.2% as of quarter end on April 1, 2017. The early upside has been driven largely by financials, which are tracking to a 19.0% year-over-year increase, more than 4% above quarter-end estimates. Industrials have also surprised to the upside thus far. Conversely, since earnings season began, first quarter earnings estimates have been cut for the consumer discretionary, energy, and telecom sectors, though it is probably too early to call any of these sectors “earnings season losers.” This week (4/24/17-4/28/17) is the busiest week of earnings season with 194 S&P 500 companies slated to report. All of the widely-held sectors are well represented on the earnings calendar, led by industrials.

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  • Leading indicators rise for seventh consecutive month. The Conference Board’s Leading Economic Index (LEI) pushed 0.4% higher in March, ahead of expectations but decelerating from a downwardly revised 0.5% increase in February. Eight of 10 indicators increased in March, led by contributions from the yield curve and strong new manufacturing orders survey data. The LEI has climbed 3.5% year over year, a rate that has historically been associated with low odds of a recession occurring within the next year.
  • The latest Beige Book suggests a steady economy with modest wage pressure. The Federal Reserve (Fed) released its April Beige Book last week ahead of the May 2-3, 2017 Federal Open Market Committee (FOMC) meeting. Our Beige Book Barometer (strong words minus weak words) rose to +77 in April, its highest level since +84 in January 2016, indicating continued steady economic growth in early 2017 with some signs of potential acceleration. Words related to wage pressure have held steady over the last six months at levels above the 2015-2016 average, indicating the appearance of modest but still manageable wage pressure.
  • Important period for European markets. This week, we examine the importance of European market earnings, particularly in important sectors like energy and banking. Expectations remain high for earnings growth throughout 2017, which has kept us cautious on investing in European markets. Political risks also remain, but seem to be abating as we get past the first round of French Presidential elections.

MonitoringWeek_header

Monday

  • Germany: Ifo (Apr)

Tuesday

  • New Home Sales (Mar)

Wednesday

  • BOJ Outlook Report & Monetary Policy Statement
  • BOJ Interest Rate Decision

Thursday

  • Durable Goods Orders (Mar)
  • Eurozone: Consumer Confidence (Apr)
  • ECB Interest Rate Decision
  • Japan: CPI (Mar)

Friday

  • GDP (Q1)
  • UK: GDP (Q1)
  • Eurozone: CPI (Apr)

Saturday

  • EU Leaders Summit
  • China: Mfg. & Non-Mfg. PMI (Apr)

 

 

 

 

 

 

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: April 17, 2017

MarketUpdate_header

  • Stocks tick higher to begin week. U.S. equities are slightly higher this morning as earnings season ramps up this week with 63 S&P 500 components set to report. Markets moved lower the final three sessions of the last week’s shortened trading week, concluding with a 0.7% loss for the S&P 500 on Thursday which was led lower by energy (-1.9%) and financials (-1.7%). Asian indexes closed mixed overnight, with the Nikkei gaining 0.1%, while China’s Shanghai Composite slipped 0.7% as a request from the country’s top securities regulator to tighten controls overshadowed an upside surprise to Gross Domestic Product (GDP); European markets are closed for Easter Monday. Meanwhile COMEX gold ($1291/oz.) is near flat, WTI crude oil ($53.03/barrel) is dropping 0.3%, and the yield on the 10-year Note little changed at 2.23%.

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  • First big earnings week on tap. This week 16% of the S&P 500’s market cap will report first quarter 2017 results, highlighted by the financials and industrials sectors. Banks got the season off to a good start late last week, pushing the financials earnings growth rate to near 18% from an estimated 15.6% over the past week. Overall, Thomson-tracked consensus for S&P 500 earnings is calling for a 10.4% year-over-year increase in the quarter; a strong 76% earnings beat rate thus far has lifted overall earnings growth by 0.2% (though just 6% of the S&P 500’s market cap reported last week). Look for our earnings dashboard here on April 24.
  • Consumer prices fell in March. The consumer price index (CPI) fell 0.3% month over month in March, below consensus expectations for a flat reading. Core prices, excluding food and energy, slipped 0.1% month over month, the first sequential decline since January of 2010 and well below consensus estimates of +0.2%. The drop pushed the year-over-year changes in headline and core prices to 2.4% (down from 2.7% in February) and 2.0% (down from 2.2% in February), respectively. The drop in prices was broad based, driven by a combination of wireless phone services, apparel, autos, and housing. We continue to expect two more rate hikes from the Federal Reserve (Fed) in 2017, but the soft data in March may cause markets to at least partially discount the probability of a June hike, which is currently about a coin flip based on fed funds futures markets.
  • Retail sales fell for the second straight month. Following a downward revision to February, retail sales fell for the second straight month in March, slipping 0.2% (vs. consensus of -0.1%), though sales increased by a respectable 5.2% on a year-over-year basis. Core retail sales (excluding autos, gasoline, building materials and food services), rose 0.5% month over month, above expectations, after a downwardly revised 0.2% decline in February. Consumer spending clearly slowed in the first quarter after a strong finish to 2016, but weather, delayed tax refunds, and seasonal quirks in first quarter data in recent years suggest a rebound in the second quarter is likely. Still, first quarter gross domestic product, based on available data to date, is tracking to only about 1%.
  • Upside surprise to Chinese GDP. The Chinese government released its official Q1 GDP report overnight, up 6.9%, better than expectations which generally were in the 6.5%-6.7% range. Economic indicators were up across the board, including growth in Fixed Asset Investment (infrastructure and real estate spending), which is often heavily influenced by government policy, and retail sales. Consumer spending is key to the Chinese government, as it is trying to manage its economy away from infrastructure and heavy industry and toward consumer spending and the service sector.
  • Though many are skeptical regarding Chinese GDP growth figures, what may matter most is how China responds to them. Because the government is signaling that the economic situation is strong, it gives it room to be more aggressive on important issues, primarily the debt problem. Chinese shares were down slightly despite the positive data. Why? Perhaps because of the government’s signal that policy will shift away from supporting the economy (which officially no longer needs the support) and toward dealing with these longer term imbalances.
  • Checking in on technicals, sentiment, and uncertainty. This week we will take a look at market technicals, sentiment, and the ever increasing uncertainty. The good news is market breadth remains strong and globally we are seeing many major markets in uptrends as well. Still, sentiment is a mixed picture and the level of uncertainty remains high. All of this, coupled with the historically low level of market volatility during the first-quarter, makes the potential for higher volatility very likely.

MonitoringWeek_header

Monday

  • BOJ: Kuroda Speaks to Trust Companies Association

Wednesday

  • Beige Book
  • Eurozone: Trade Balance (Feb)
  • Eurozone: CPI (Mar)

Thursday

  • Initial Jobless Claims (Apr 15)
  • Conference Board US Leading Index (Mar)
  • Eurozone: Consumer Confidence (Apr)

Friday

  • Existing Home Sales (Mar)
  • Eurozone: Markit Mfg. & Services PMI (Apr)
  • CAD: CPI (Mar)
  • ECB: Current Account (Feb)

 

 

 

 

 

 

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: April 10, 2017

MarketUpdate_header

  • Stocks move higher to start week. U.S. equities are modestly higher this morning as investors look ahead to the start of first quarter earnings season, with several tier one banks set to report later this week. This after major indexes shook off a lackluster jobs report and pushed higher through midday, only to give back gains late in the session; the S&P 500 fell 0.1%. The telecom (+0.2%) and healthcare (+0.2%) sectors clung to modest gains, while financials (-0.3%) and energy (-0.4%) stocks were among the days’ laggards. Overseas, investors are focusing on political turmoil stemming from Syrian incidents amid light economic data; Asian markets were mixed overnight, with the Nikkei (+0.7%) advancing, and the Shanghai Composite (-0.5%) moving lower; while European indexes are near flat amid range-bound trading. Elsewhere, WTI crude oil ($52.80/barrel) continues to climb on regional turmoil in the middle east, COMEX gold ($1250/oz.) is lower, and Treasury yields are down slightly to 2.37% on the 10-year.

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  • Over the last month, the LPL Financial Current Conditions Index (CCI) fell 20 points to 235. The CCI remains in the middle of the range it has held since 2010. Falling shipping traffic and an increase in initial jobless claims off of near 40-year lows were the main detractors from the CCI in the last month, while fed fund rate expectations and credit spreads were the main positive contributors.
  • Inflation and highlights from this week’s economic calendar. Despite Friday’s holiday, retail sales and the consumer price index (CPI) will be reported on that day (producer prices come Thursday) and will highlight what is otherwise a quiet week of data in the U.S. Two reports that deserve some attention, however, are National Federation of Independent Business (NFIB) Small Business Optimism and JOLTS (Job Openings and Labor Turnover) which will provide some insights into the policy-driven rise in business confidence and the job market, where Friday’s weak payroll employment report raised some concerns. Overseas, we get Chinese and Japanese trade data and G7 Finance Ministers will meet, while geopolitical risk will remain in focus following last week’s military strike in Syria.
  • S&P 500 poised for double-digit earnings gain. The S&P 500 is likely to produce double-digit year-over-year earnings growth for the first quarter (Thomson-tracked consensus is +10.1%) as earnings season gets underway this week. Earnings growth would reach 12-14%, the best since 2011, should companies beat estimates by the average 4.1% seen over the last five years according to FactSet. Last year’s first quarter marked the trough of the earnings recession, setting up an easy comparison, though we have several other reasons to be optimistic. Growth is expected to be powered by energy’s rebound from the oil downturn that battered the sector early last year while solid macro data in recent months is also supportive.
  • Fed balance sheet. Minutes from the recent Federal Reserve (Fed) meeting, released last Wednesday, signaled that the Fed intends to reduce its sizable $4.2 trillion balance sheet. We’ll analyze the options available to the Fed to accomplish a reduction of this size. In addition to how the balance sheet was built, we look at the structure of the assets within the portfolio for clues as to how the normalization may impact markets.
  • Continued strong breadth. The New York Stock Exchange (NYSE) Composite Advance/Decline (A/D) line broke out to new highs last week. This is one of our favorite technical indicators, as it shows how many stocks are advancing versus declining at any given time. In other words, it measures overall market breadth. To see new highs occur suggests there is a good deal of investor participation and the overall equity rally could continue to have legs. Also, the NYSE A/D line broke out to new highs one year ago this week, well ahead of the eventual S&P 500 Index’s (SPX) new highs in July 2016.

MonitoringWeek_header

Tuesday

  • Eurozone: Industrial Production (Feb)

Wednesday

  • Bank of Canada Rate Decision & Monetary Policy Report

Thursday

  • Initial Jobless Claims (Apr 1)

Friday

  • Banks Open, Markets Closed
  • CPI (Mar)
  • Retail Sales (Mar)

 

 

 

 

 

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 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.

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  • 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.

Monthly Market Insights | December 2016

U.S. Markets

A surprise election outcome ignited an unexpected rally that pushed stocks into record territory, as investors anticipated faster economic growth, lower corporate taxes and increased infrastructure spending under the newly elected president.

For the month, the Dow Jones Industrial Average jumped 5.4 percent, the Standard & Poor’s 500 Index gained 3.4 percent, and the NASDAQ Composite rose 2.6 percent.1

Head Fake

The wave of investor selling overseas in response to the U.S. election results threatened to extend to domestic stocks, with U.S. stock futures down sharply prior to the first day of post-election trading. However, instead of dropping, stock prices jumped as investors appeared to focus more on the potential positives of a Trump presidency than its uncertainties.

quote

Along with the rally in prices came a weakening in the strong correlations among industry sectors that have existed for some time now. For example, since the election, the correlation between financial stocks and the S&P 500 Index fell to 0.59, down from 0.89 on November 7.2 (A correlation of 1.0 indicates the two are moving in perfect harmony.)

Correlation Watch

When examined more broadly, a benchmark measuring the anticipated average correlation among stocks dipped to its lowest level since 2008.3  Whether lower correlations become a more permanent feature of the markets remains a question mark.

Long-Term Trend?

Should the larger dispersion of returns among industry sectors persist, the ability of investors to separate leaders from laggards may be met with greater reward than it has been met with in the recent past. In short, a weakening in correlations potentially could mean more opportunities for active managers to outperform popular indexes.3

After posting gains for three straight weeks in November, market momentum stalled in the closing days of trading, despite news that OPEC nations reached an agreement to cut oil production.

Sector Performance

The majority of industry sectors posted strong gains, led by Financials (+12.34 percent) and Industrials (+9.16 percent). Also advancing were Consumer Discretionary (+5.77 percent), Energy (+2.10 percent), Health Care (+2.40 percent), Materials (+5.74 percent) and Technology (+1.33 percent). Meanwhile, Consumer Staples (-2.41 percent), Real Estate (-0.49 percent) and Utilities (-0.39 percent) ended lower.4

us-market-11-2016

World Markets

World markets did not participate in the stock market rally experienced in the U.S., with the MSCI-EAFE Index sliding 2.05 percent for the month.5

Some European markets struggled in November, weighed down by persistent economic weakness and growing concerns about spreading populism in the wake of Brexit and the election of Donald Trump. U.K. and Germany closed lower while France posted a slight gain.6

Markets in the Pacific Rim grappled with their own challenges, while Australia managed a slight gain on stronger commodity prices.7

World Markets 11-2016.png

Indicators

Gross Domestic Product: The economy expanded at a rate of 3.2 percent in the third quarter, up from the initial estimate of 2.9 percent. This represents the strongest growth in two years.8

Employment: The unemployment rate dipped to 4.9 percent as employers added 161,000 new nonfarm jobs, while the prior two months saw upward revisions from original estimates. Average hourly earnings for private-sector workers jumped 2.8 percent, year-over-year, the largest such increase since June 2009.9

Retail Sales: On the eve of holiday shopping season, retail sales jumped 0.8 percent, while September sales were revised upward to 1.0 percent, from the originally reported 0.6 percent increase. These back-to-back increases represent the best two months in at least two years.10

Industrial Production: Industrial output was unchanged in October as unseasonably warm weather kept home and office heating demands low.11

Housing: Housing starts increased 25.5 percent, the fastest pace since August 2007. Through October-end, starts were higher by 5.9 percent.12

Sales of existing homes increased 2.0 percent, touching a sales level not seen since February 2007.13

New home sales, however, declined 1.9 percent in October, though they are 12.7 percent higher year-to-date over the same 10-month period last year.14

CPI: Consumer prices jumped 0.4 percent from a month earlier. When compared to a year earlier, the increase represents the fastest rate in two years, signaling firming inflationary pressures.15

Durable Goods Orders: Posting the biggest increase in a year, orders of durable goods jumped 4.8 percent in October, propelled by a nearly 100 percent increase in civilian aircraft orders. September’s durable goods orders were revised higher, from an initial decline to a 0.4 percent gain.16

The Fed

In testimony to Congress, Janet Yellen on November 17 reiterated her belief that the U.S. economy is stable enough to absorb an interest rate hike, telling lawmakers that such an increase might come “relatively soon.” Her comments confirmed market expectations of a Fed hike in the federal funds rate at its next meeting on December 13-14.17

What Investors May Be Talking About

December is one of the best performing months on an historical basis. Since 1926, it has experienced the highest number of positive monthly returns of any month, the fewest number of negative returns, the least performance volatility and the second highest average return.18

Since past performance is not indicative of future results, this December’s market performance may turn on how investors respond to the wealth of news that unfolds over the course of the month.

Secrets of the Temple

Perhaps the most critical news might be what the Fed does about the federal funds rate. The Fed has signaled that a hike may be likely in December, though they may reconsider taking action in light of the unexpected election result.

If they move ahead with a rate hike, how the markets will respond may depend on whether this anticipated action has been fully priced in the markets. In the alternative scenario where the Fed delays a rate hike, the market’s response may be even greater, though no one can be sure in which direction such a development would drive stock prices.

Cabinet Positions

There is a Washington D.C adage, “personnel is policy.” This may never be truer when it comes to the incoming Trump presidency. Markets may be watching very closely any news about potential Cabinet appointments as a sign of the policy direction that the new administration may be taking once it assumes office in January.

Markets also are expected to keep an eye on consumer spending, which accounts for more than two-thirds of GDP.19 No month is more critical than December for retail sales.

Retail Spending

For some retailers, the holiday season can represent as much as 30 percent of annual sales, with jewelry stores reporting the highest percentage (27.4 percent) during the 2015 holiday season. Overall, last year’s holiday sales represented nearly 20 percent of total retail industry sales.20

As December marks the close of 2016 and represents the gateway to a new year, the uncertainty that reigns over the economic and foreign policies that will be pursued by President-elect Trump may lead to bouts of market skittishness in the weeks and months ahead.

By the Numbers

Beginnings and Endings

Year the first “greenbacks” were issued in the U.S.: 186121
Birth of the mail-order catalog: 174422

The first self-made multimillionaire in America: John Jacob Astor (1763-1848)23Famous hotel co-founded by Astor’s grandson and namesake: The Waldorf-Astoria24
How Astor’s grandson died in 1912: Aboard the Titanic24

First year Social Security taxes were collected: 193725
Size of the first lump-sum Social Security check: 17 cents25

Approximate number of kindergarteners in the U.S.: 3.7 million26
Approximate number of students who graduate from high school each year: 3.5 million26
Percent of graduating seniors who enroll in college the following fall: 68.4%26

Approximate number of new businesses started in the U.S. last year: 680,00027
Share of new businesses that survive 20 years or more: About 1 in 527

Success rate of businesses whose founder has previously started a successful business: 30%28
Success rate for businesses whose founder has previously failed with a start-up: 20%28
Success rate for first-time entrepreneurs: 18%28

Average retirement age: 6329
Share of Americans who plan to “keep working as long as possible:” 27%30

Number of AirBnB users over age 60: 1 million31
Percent of AirBnB hosts over age 60: 10%31

Percentage of retirees who say going on an RV trip is very appealing: 24%31
Most popular bucket list item, according to bucketlist.net: See the Northern Lights32

 

 

 

 

 

 

 

  1. The Wall Street Journal, November 30, 2016
  2. The Wall Street Journal, November 23, 2016
  3. The Wall Street Journal, November 23, 2016
  4. Interactive Data Managed Solutions, November 30, 2016
  5. MSCI.com, November 30, 2016
  6. MSCI.com, November 30, 2016
  7. MSCI.com, November 30, 2016
  8. The Wall Street Journal, November 29, 2016
  9. The Wall Street Journal, November 4, 2016
  10. The Wall Street Journal, November 15, 2016
  11. The Wall Street Journal, November 16, 2016
  12. The Wall Street Journal, November 17, 2016
  13. The Wall Street Journal, November 22, 2016
  14. The Wall Street Journal, November 23 18, 2016
  15. The Wall Street Journal, November 17, 2016
  16. The Wall Street Journal, November 23, 2016
  17. The Wall Street Journal, November 17, 2016
  18. Yardeni Research, “Stock Market Indicators: Historical Monthly and Annual Returns,” Yardeni Research,” October 2, 2016
  19. The Wall Street Journal, October 14, 2016
  20. National Retail Federation, 2016
  21. UScurrency.gov, 2016
  22. Wikipedia, October 20, 2016
  23. Britannica.com, 2016
  24. Encyclopedia-Titanica.org, 2016
  25. Social Security Administration, 2016
  26. NCES.ED.gov, 2016
  27. Bureau of Labor Statistics, April 28, 2016
  28. Inc.com, October 21, 2015
  29. SmartAsset.com, October 28, 2016
  30. Bloomberg, May 13, 2016
  31. Forbes, June 3, 2016
  32. BucketList.net, 2016

Source: Lake Avenue Financial

Market Impact of a Trump Presidency

Donald Trump emerged as the winner last night of a hotly contested presidential campaign and will be inaugurated as the 45th president of the United States on Friday, January 20, 2017. The transition to a Republican presidency and Trump’s rejection of politics as usual, which drew so many voters, naturally lead to questions about his impact on the economy and markets. Today on our blog we provide a high level overview of our thoughts of the significance of a Trump presidency.

ECONOMY

Does Trump’s win change LPL’s view on the economy over the remainder of 2016 and into 2017?

The election results have not changed our long-term outlook for the U.S. economy. We will continue to monitor many important economic indicators, including the Five Forecasters, the Current Conditions Index, and the Recession Watch Dashboard, and will keep you updated in the event of any changes to our views.

Will the election results cause a recession?

Elections do not in and of themselves cause recessions. Policies can, however, and we need to wait to see which policies Trump moves forward with and the details of those policies.

Our Recession Watch Dashboard continues to point to an overall low risk of recession within the next year.

What impact might the election have on overseas economies and markets?

Trade has been a major theme in this election, yet a president’s ability to impact trade directly and immediately is somewhat limited. Trump has been outspoken in favor renegotiating NAFTA terms and has been opposed to the TransPacific Partnership (TPP), which has little chance of passing. The Trump victory raises some concern across foreign markets about U.S. trade.

FED

Will the election results impact Fed monetary policy later this year and in 2017?

We do not believe the election results have changed the Fed’s outlook. Furthermore, we believe the Fed is much less sensitive to financial markets than most people think. As it stands, we believe the Fed is on course to increase rates at its December meeting, with another 2-3 increases in 2017. It would take a major market disruption or a change in the economic fundamentals for the Fed to alter this course.

EQUITIES & FIXED INCOME

Will the election result cause a bear market in equities?

Just as an election does not cause a recession, it does not cause a bear (or bull) market. Government policies alone do not change the market’s long-term trend, although they are a factor.

Shorter term, elections are rarely a harbinger for a sell-off, and when they have been, the election has not been the primary cause. In election years since 1952, the S&P 500 has returned an average of 2.5% in November and December and has been higher 75% of the time. From Election Day until Inauguration Day, the S&P 500 has averaged a gain of 1.0% and has been higher 69% of the time. The median return jumps to 3.0% because of a nearly 20% drop in 2008 that skews the average return, but 2008 returns were fundamentally driven by the recession, not Obama’s election. The bottom line is some near-term volatility is likely, but a massive sell-off absent an economic recession has never happened in the period between the election and inauguration.

Are the near-term results impacted by the party of the President?

There doesn’t appear to be much of a difference in equity performance over the short term. Since the election in 1952, the final two months of the year have returned 2.6% when a Republican wins and 2.4% when a Democrat wins. Looking at the largest drops the final two months of an election year in 2000 (Republican victory) and 2008 (Democrat victory) stand out, as the S&P 500 dropped 7.6% and 6.8%, respectively. Both times the economy was either in a recession (2008) or about to fall into a recession (2000) – which greatly contributed to the equity weakness. With the end of the earnings recession, improving consumer confidence, and the best quarterly GDP print in two years – we presently have an improving economic backdrop, which should help contain any large downside moves in equities the rest of 2016.

Which sectors would likely benefit under Trump?

Biotech and Pharmaceuticals: Although Trump has stated his desire to repeal the ACA and has favored drug re-importation from other countries, controlling drug prices is unlikely to be as high of a priority for him as it would have been for Clinton. As a result, biotech and pharmaceutical companies may get a bump. We believe the market may have overreacted to perceived policy risk and we continue to favor the healthcare sector, which has historically performed well after elections.

Energy: Trump is likely to be positive for fossil fuels. He has promised less regulation on drilling, along with expansion of drilling areas. The segment of the industrials sector that services the energy sector may also benefit.

Financials: The Trump administration is likely to be easier on financial regulation than Clinton would have been. Trump has indicated he would like to roll back financial regulations, including the Dodd-Frank legislation enacted as a result of the financial crisis. Trump has also suggested bringing back Glass-Steagall, which would separate traditional banking from investment banking, a move we see as very unlikely.

How will the election impact the dollar and bonds?

Dollar: Trump’s policies are likely to be relatively negative for the U.S. dollar. His comments on renegotiating U.S. debt held by foreigners may limit the attractiveness of bonds to foreign investors.

Bonds: We saw an initial Treasury rally as stocks sold off overnight, but yields have since moved higher. We expect there may continue to be additional volatility as markets digest the news, but we broadly believe markets may be pricing in a rise in deficit spending, which is pushing yields higher; though continuation of low rates overseas is an offsetting factor, potentially keeping rates somewhat range bound over the near-term.

Will Trump’s policies lead to a debt downgrade?

Trump had mentioned last spring the possibility of renegotiating our debt and paying back less than the full amount if the economy were to falter. This idea, if implemented, would almost certainly lead to a debt downgrade. However, he backed away from this idea a few days after he floated it.

More realistically, Trump has signaled higher deficit spending. While deficit spending was a contributing factor to the U.S. debt downgrade by S&P in August of 2011, it wasn’t the only reason. The main driver of the downgrade was the debt ceiling crisis, as Republicans demanded a deficit reduction package before they were willing to join Democrats in raising the debt ceiling. Divided government and partisan politics led to months of debate and an eleventh hour deal that avoided a default. With Republicans keeping control of the Senate and the House, a fight over the debt ceiling fight that could threaten the U.S. credit rating is unlikely.

COMMODITIES

What is the election impact on gold?

Gold can thrive in chaotic environments and the uncertainty surrounding Trump’s policies could offer some support to the commodity.

What is election impact on oil?

When discussing oil, it is important to remember that oil stocks and crude oil can have very different performance, even though investors often expect similar returns.

Trump’s victory is likely a positive for oil stocks, especially in the short run. He has promised reduced regulations on oil and gas production, which would improve profitability of existing projects and may result in a very marginal increase in U.S. production. Note, this may be a negative for energy prices.

VOLATILITY

Will volatility increase due to the election outcome?

We expect that market volatility will likely increase. Equity markets have experienced abnormally low volatility recently, in part because of central bank intervention. As those interventions decrease, volatility should increase. However, we view that increase as a healthy aspect of equity markets. The degree to which the election results impact volatility will depend a great deal on which policies are actually enacted as a result of the changes in Washington.

 

 

 

 

IMPORTANT DISCLOSURES

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. 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. Investing in foreign and emerging markets securities involves special additional risks. These risks include, but are not limited to, currency risk, geopolitical risk, and risk associated with varying accounting standards. Investing in emerging markets may accentuate these risks. 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. 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, geopolitical events, and regulatory developments. Because of its narrow focus, investing in a single sector, such as energy or manufacturing, will be subject to greater volatility than investing more broadly across many sectors and companies. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. This research material has been prepared by LPL Financial LLC.

What Happens Historically After Elections?

As America heads to the polls tomorrow to elect our next leader, many questions have come up. The most logical from an investment point of view is what will happen to equities. We addressed this important subject last week in Could There Be A Big Sell-Off After The Election? Taking another look at this, today we’ll break down what has happened historically from election day until inauguration day.

Going back to 1952*, the S&P 500 has gained from election day until inauguration day in 11 out of 16 elections for an average return of 1.0%. The median return jumps up to 3.0%, as things are greatly skewed by the huge 19.9% drop during the financial crisis.

what-happend-from-election-day-till-inauguration-day

The reality is if the economy is on firm footing and not in a recession (2008) or falling into a recession (2000), most the time the returns have been rather strong for the S&P 500. Considering the economy currently is probably the best economy an incoming president has inherited since Clinton in 1992, this could be another plus for equities after this election.

Last, here’s another look at all the returns after elections since 1952.

market-returns-after-elections-since-1952

 

 

 

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. * Any data prior to March 4, 1957 is back-tested, as published by the index’s parent company, S&P DOW Jones Indices. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns. The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. 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.

Cast Your Vote at the Polls, Not Your Portfolio

On “CBS This Morning”, Rob Kapito, President of BlackRock, counseled investors to keep the long-term in mind as they confront investing in an uncertain election season, drawing on insights from BlackRock’s latest Investor Pulse Survey.

This survey shows the election is looming large in the minds of investors. It finds nearly two-thirds of Americans say the election has impacted their investment decisions over the past year. About one-third feel the election poses a threat to their financial future.

Source: BlackRock

The End of Welfare As We Know It

Clients of Stewpot, a soup kitchen in Little Rock (Alana Semuels / The Atlantic)
Provided by Atlantic Media Company

By the numbers, welfare reform was a success.

More than 13 million people received cash assistance from the government in 1995, before the law was passed. Today, just three million do.

“Simply put, welfare reform worked because we all worked together,” Bill Clinton, who signed into law welfare reform, or the Personal Responsibility and Work Opportunity Reconciliation Act of 1996, wrote in an op-ed in The New York Times in 2006. Clinton hadcampaigned on a pledge to “end welfare as we know it” and today it is all too apparent that he succeeded.

The law replaced AFDC (Aid to Families with Dependent Children) with TANF (Temporary Aid to Needy Families—“temporary” being the key word). It stipulated that people could receive no more than five years of government benefits in a lifetime, though states could set their limits lower and many did, with some instituting a two-year lifetime limit. It required a certain percentage of welfare recipients in states to be working, and said that those who couldn’t find jobs would have to participate in community service or get vocational training. Those who didn’t work or volunteer would eventually be kicked off the welfare rolls.

The law also changed the way the federal government handed out assistance. TANF is administered through so-called block grants to states, which then can spend it any way they want to help low-income families, with little federal oversight. If states spend the money on cash assistance, they have a number of rules they have to follow, but they’re also free to spend it on something else entirely; Michigan, for instance, spends much of its block grant on college scholarships; Texas spends much of its on foster care, according to H. Luke Shaefer, a University of Michigan professor and a co-author of $2.00 A Day: Living on Almost Nothing in America.

“There’s this this crazy notion that we retrenched welfare—what we really did was reorient it towards people who are working when they are working, and away from people who are struggling at the very bottom,” he said. The original welfare program cost around $30 billion in today’s dollars, he said, while the government now spends twice as much on that on the Earned Income Tax Credit, expanded in the 1990s to incentivize the poor to work.

If nothing else, these policies were an effective way to reduce the number of people on welfare rolls. People on the left and right agree that they helped change a program that was in need of reform. But there were real human costs too: Those who didn’t find jobs, who weren’t working, who lived in states trying to reduce their cash-assistance programs, were left to struggle on their own.

The number of families with children who reported that the only benefit they received was SNAP grew 143 percent between 1996 and 2006.

Today, in large part because of welfare reform, the safety net—the set of government efforts to come to the aid of the country’s citizens when they are down on their luck, much of which has existed since the Great Depression— is thin and getting thinner. And this thinning goes beyond welfare, which gives needy families cash support: On April 1, between 500,000 and one million childless adults will lose access to food stamps (officially known as Supplemental Nutrition Assistance Program, or SNAP). This is the belated consequence of a rule that was part of Clinton’s welfare reform, which stipulated that childless adults can only receive three months of food stamps if they aren’t employed at least 20 hours a week or in a training program. For years states received waivers for the rule, but in many states, governors have chosen not to ask for extensions for this year.

Few states have cut their assistance to the very poor more than Arkansas has. In 2014, there were seven families on TANF for every 100 families with children in poverty in Arkansas, down from 40 out of every 100 poor families in 1995, according to the Center on Budget and Policy Priorities. (In Minnesota, by contrast, that fell from 89 out of 100 poor families who received benefits in 1995 to 41 out of 100 in 2014.) The number of welfare recipients in Arkansas dropped to just 9,901 in September of 2015, from more than 63,000 in 1995. And a single-parent family of three receives just $204 a month from the state of Arkansas, one of the lowest cash benefits in the nation.  Arkansas hasn’t quite gotten rid of its safety net entirely, but it’s gone as far toward that end as any place in modern America. And it may go further yet.

* * *

At a church in downtown Little Rock, the city’s homeless, mentally ill, and long-term unemployed stream in from all corners to get a something to eat. They climb the dark staircase and wait in line for a Styrofoam cup of soup, a cup of potatoes and beans, a few Saltines, and a slice of bread.

They include a woman named Stacy, who didn’t want to provide her last name.

Before she lived on the streets, she worked as a registered nurse for 20 years. But a series of events—she declined to specify—knocked her out of steady work and into homelessness, and getting back on her feet is hard. The only public assistance she qualifies for is food stamps, but on April 1, that will end.

“They’re shutting off the only benefit I have,” she says, straightening the pink bandanna that covers her dark hair.

The knowledge that her benefits will be ending equips her with little that she didn’t already have. She’s been trying to find a job, but it’s hard with nowhere to sleep, no cash coming in, no steady meal. She needs to renew her nursing license but doesn’t have the resources to do so; even finding money for a bus pass is tough. A nearby church gives them out sometimes, but recently, they’ve run out, she says.

This dilemma is a common one facing people in many states, including Arkansas, which have high poverty rates but little assistance for people trying to get out of poverty.

Governor Asa Hutchinson, Republican, could have asked for a waiver to the SNAP requirement that adults like Stacy work after three months, but he decided not to, he told me, in a phone call. The state’s unemployment rate, currently at 5.7 percent, had decreased enough that he believed there were enough work opportunities in the state, he said. If someone still can’t find a job, they can always volunteer, he said.

“They still have the opportunity to contribute to a local food bank or some other local nonprofit,” he said. “That contribution brings dignity, it is helping the community, it is giving back, and that seems a good balance to me.”

So why doesn’t someone like Stacy just do that and avoid losing her food stamps? For one, finding a place to volunteer or work can be very hard for those who don’t have phones, mailing addresses, or work clothes. Many do not have the education or wherewithal to find a volunteer position. And for those who want to get more education to find work, the job-training opportunities in Arkansas are insufficient in helping people get the skills they need to find permanent work, said Tomiko Townley, the SNAP and Older Adult Outreach Manager at the Arkansas Hunger Alliance.

“The reality is that the majority of employment training programs in Arkansas, are things like job search training,” she said. “They’re very limited, not super skill-oriented opportunities.”

The consequences of a dialed-down safety net might not be so dire if the state were thriving, but that’s not the case. Arkansas consistently ranks at the bottom of the nation’s poverty rankings: In 2014, nearly one in five people lived below the poverty line ($23,834 for a family of four), making the state 48th richest in the nationincluding the District of Columbia. (Only Louisiana, Mississippi and New Mexico were poorer.)

Governor Asa Hutchinson (Cliff Owen / AP)
Provided by Atlantic Media Company

But poor families don’t receive much assistance from the state of Arkansas. Under TEA, the state’s version of TANF, families can only receive two years of government assistance in a lifetime, though the national limit is five years. Those receiving TEA must work or volunteer 35 hours a week, although the federal requirements are only 20 hours a week.

The way that Arkansas treats its poor is not exactly a break with tradition, Ernie Dumas, a long-time Little Rock political columnist and historian told me. Arkansas was poor when it was settled, and generations of politicians “entertained no notions of progress or what it might take to improve services to people or the need to elevate them,” he told me. In the early part of the 20th century, Arkansas was already among the poorest states in the nation; it also had the lowest taxes in the nation, so funds for substantial anti-poverty initiatives were not available. Then came floods, drought, and the Great Depression, and a re-commitment to the belief that the state shouldn’t interfere to help its residents, he said.

Bill Clinton legitimately wanted to help the poor when he was governor, Dumas said. Dumas remembers seeing Clinton around town, always talking to people about their lives and how he could improve them. When he ran for president, Clinton frequently talked about visiting welfare offices in Arkansas and meeting recipients. But the welfare reform bill he signed, which had been pushed by a Republican Congress, left many in his home state without public help.

After welfare reform, Arkansas had a “golden opportunity” to improve life for people in poverty, Rich Huddleston, the executive director of Arkansas Advocates for Children and Families, an advocacy group that counts Hillary Clinton as one of its founders, told me.

Instead, “it has been a total disaster for the state,” said.

The state focused on reducing the welfare caseloads by disqualifying people, rather than on helping people get a job, he said. For many people, the hoops to jump through to get on TEA are so confusing that they don’t apply at all. By law, the state is supposed to assess recipients when they apply for TEA and refer them to a service that can help them find a job, go back to school, or get vocational training. But in many cases, Huddleston said, people get referred to services that don’t exist in their area of the state.

Raquel Williams knows how difficult it is to go through the process of applying for and receiving TEA. A year ago, Williams was steadily employed in Texarkana, Texas, in a state unemployment office. But when her husband, an EMT transporter, couldn’t find work, he convinced her to quit her job and move with their children to Little Rock so he could find a job there. She had trouble in her job search from the start, but their problems multiplied when he was shot on December 26. He survived the shooting, but can’t work and can’t walk. So Williams started looking for a job.

It seems like this should be easy: Even on her toughest days, she is well-dressed, neat, and affable, and seems like the type of person who would be someone else’s boss. She has work experience. But she hasn’t found a job, and the family has no money coming in. So she applied for TEA.

Right away, Williams told me, she felt as though the system was not there to make her life any easier, let alone help her find work. She had to bring them all sorts of paperwork before they would begin helping her; proof that she wasn’t getting child support from the father of her first child, proof that her husband wasn’t receiving disability, proof that she was a resident of Arkansas, that she had children, that they had Social Security numbers.

“Might as well have given them a blood sample,” she told me.

Weeks after applying, she had an interview, where she was told that she and her family could receive $247 a month, but that she would have to start volunteering 35 hours a week almost immediately. She could get compensated for the gas money she used getting to the volunteering position, she was told, but only at the end of the month.

Between volunteering, taking care of her kids, and tending to her ailing husband, she’s found the time to apply for jobs, though she’s had no help from the TEA office in looking for work and hasn’t had many bites. She wants to go back to school, but since her GPA is low from a previous try at college, she’s unlikely to get scholarships and she’ll have to pay for it herself.

Often times, she wonders why she goes through all of it for a mere $247, which isn’t nearly enough to pay the family’s $650 rent, gas, and heat. She kicks herself for following her key principles of Faith, Family, and Work—if she had just left her husband and stayed in Texas, if she had lied on a job application that asked if she smoked, if she had just kept the old job, she would have been fine. Now, she says, she’s stuck.

“The program is designed to keep you in a rut,” she told me. “It’s not built to empower anybody.”

Raquel Williams at her volunteering position in Little Rock (Alana Semuels / The Atlantic)
Provided by Atlantic Media Company

It’s true that there are few support systems in place once people start working to help them stay employed and prosper. Many of the people who do find jobs end up in low-paying ones with no room for advancement, Huddleston said. There just aren’t very many good jobs in Arkansas for people without a college education, and the state hasn’t invested in programs that would allow people to get a college education or other sorts of training that could help turn jobs into upwardly-mobile careers. And, anyway, Huddleston said, Arkansas public schools have struggled so badly in the past few decades that many TEA recipients wouldn’t be qualified for college even if they could afford it.

“To say that it had anything but an impact on the caseload would be misleading in Arkansas, just because of the challenges we had,” he told me. “The challenges of isolated rural areas, the state of the economy, what jobs paid here—it made it really difficult for folks to get off welfare and earn an income they really needed to support their families.”

* * *

This crisis isn’t unique to Arkansas. As H. Luke Shaefer and Kathryn J. Edin document in $2.00 a Day: Living on Almost Nothing in America, welfare reform created a class of extremely poor people, neither working nor receiving help from the government. Researchers call these people “disconnected,” and nationally, one in five single mothers were disconnected by the mid-2000s. The number of families with children who reported that the only benefit they received was SNAP grew 143 percent between 1996 and 2006.

“The transition to a work-based safety net is incomplete, and we have a big hole in the bottom,” Shaefer told me. “For folks at the very bottom, it’s leading to very bad outcomes.”

Between 1996 and 2011, even as the welfare rolls were shrinking and more one-time recipients were moving to work, extreme poverty was increasing. During that time, the number of families living on $2 a day or less rose 150 percent, to 1.65 million.

Living in extreme poverty has very real consequences for families, Shaefer said. Reduced TANF access in states is associated with higher food insecurity, increased child homelessness, a jump in foster care placement, and more juvenile detention, according to soon-to-be-published research by Shaefer and colleagues. Not having access to cash means people can’t pay the rent and then become homeless, and homelessness leads to stress, which can hurt people emotionally and physically. Families are often forced to sell their food stamps, their plasma, their bodies, to get access to cash to survive on, he said.

Welfare reform had big goals of moving people to self-sufficiency by training them to work. But it did little to create job opportunities or the types of programs that help people stay in jobs once they get them. Instead, they’re on their own.

“The idea that it’s a program that promotes work is a myth,” Shaefer said.

States only spend about eight percent of their TANF funds on work-related activities and supports, according to the Center on Budget and Policy Priorities. They spend 34 percent on “other areas.”

A soup kitchen in Little Rock (Alana Semuels / The Atlantic)
Provided by Atlantic Media Company

Even if those programs existed, that type of job training is rarely effective, said Jacob Klerman, a senior fellow at the research firm Abt Associates. Many of the people who need training come from bad schools and lack basic reading, writing, math, or science skills. The job training programs the government often makes available are just a few weeks long, which doesn’t prepare people for middle-class jobs, and certainly doesn’t make up for years of abysmal basic education. And it’s nearly impossible for poor people to attend longer training—much less a four-year college—because they need to be doing something to earn money to pay for living expenses, given that they likely don’t have savings or families with any wealth at all.

“We’re just not very good at job training. It’s a hard thing to do,” he said.

Of course, there are people for whom welfare reform did push them off the dole and into employment—or at least for whom welfare reform coincided with a growing economy that enabled them to find work. According to Shaefer and Edin, nearly 75 percent of low-income single mothers were employed by 2000, up from 58 percent in 1993. But even those that did find jobs weren’t necessarily lifted out of poverty, but were instead often kept there by low wages, just-in-time scheduling, and not enough hours.

“We’ve had partial success, but the problem is the winds blow against you,” said Timothy Smeeding, a poverty expert who teaches at the University of Wisconsin-Madison. “Wages and jobs have been getting worse, and you can find a job in many places, but not everywhere. Working yourself out of poverty is much harder.”

Still, if the problems with welfare reform span the country, some states are nevertheless making it worse than others. They’re able to do so because the program is set up as a block grant.

In 2010, Arizona reduced the time limit to 36 months from 60 and terminated child-only cases, according to the Center on Budget and Policy Priorities. Its caseload fell 66 percent between 2006 and 2014. States including Kansas, Michigan, and Indiana implemented similar changes and saw similar drops in the numbers.

“The safety net has been shredded in many different ways,” Liz Schott, one of the authors of the report, told me.

The differences among states has meant that the ability of the very poor to survive can depend on where they happen to live. When Amanda Ellis, an Arkansas native, moved from Minneapolis back home to Arkansas and told the state welfare office how much she’d received in TANF benefits from the government of Minnesota, they laughed in her face. The simple act of moving with her son meant that the amount of benefits she received dropped from $437 a month to $162.

“I came back, and I was being told, ‘You’re not going to be able to get on your feet that easily here,’” Ellis, a slight woman who is so shy she covers her mouth when she talks, told me.

Bouncing back after she arrived in Arkansas in 2011 was a daunting task. With almost no money, she and her son stayed in shelter after shelter after she got on TEA and started volunteering. Her welfare counselor wanted her to find a job right away, but she pushed back and said she wanted to go to school. She eventually went back to get certified as a pharmacy technician.

That was difficult: Public transit in Little Rock is lacking, and Ellis doesn’t have a car, so she would take two buses to get to class.The day I met her, her son had missed the school bus in the morning and she had to take three buses just to drop him off at school.

Ellis recently started a job as a pharmacy technician at Walmart.  She has an apartment and has finally achieved a degree of stability. It wasn’t TEA that helped her achieve these things, though. It was disability benefits, something that few other single mothers could access. Her son is autistic, and though he’d been denied disability benefits in Arkansas, a counselor had approved it in Minnesota. The disability payments helped her get an apartment and go back to school, she told me. Steady monthly payments are what other people, such as Raquel Williams, might have gotten, had welfare still existed.

* * *

Of course, people on the left and right agree that welfare was flawed and that some things needed to be changed. The concern is just that the reforms went so far in requiring people to work, and not far at all in helping them do so.

Rather than learn from welfare reform, though, states are moving forward with further rules and regulations that make the process of receiving benefits a rough, even humiliating, experience. Arkansas, for example, just became the latest state to require drug testing for all welfare recipients, a costly proposition that nets few abusers. Governor Hutchinson also wants to add work requirements for low-income people who are benefiting from the state’s Medicaid expansion.Other state legislatures are trying to make it more difficult for governors to get waivers that would allow food-stamp recipients to continue to receive benefits. North Carolina, for example, passed a law in October prohibiting the state from getting waivers for federal time limits for food stamps.

“There’s a lot of talk and a lot of movement now that we see, particularly from Republicans, that it’s time to extend what we did to TANF to other programs,” says Schott, of the Center on Budget and Policy Priorities.

The end of food stamps for childless adults is one more example of this. States like Arkansas are acting to ensure that those people who have no other benefits except food stamps lose those benefits unless they find a job, but they are most often the people who will have the hardest time finding work.

Tomiko Townley, the Hunger Relief Alliance case manager, knows what this will mean for single, childless adults in Arkansas. On April 1, thousands of Arkansans will go to buy food, swipe their card, get an error message, and have no idea why they aren’t receiving help anymore. They’ll turn to food pantries and soup kitchens, who will be overwhelmed by the demand.

And then, they’ll disappear off the government’s rolls, just as the welfare recipients have. The numbers of people receiving food stamps will drop, and thousands more people won’t be able to eat, or survive. But to the policymakers who look for a shrinking welfare program, the changes will be considered a success.

Written by Alana Semuels of The Atlantic

(Source: MSN)