Market Update: June 5, 2017


Last Week’s Market Activity

  • Solid Friday and holiday-shortened week for stocks… and more record highs. S&P 500 gained +0.36% on Friday, +0.96% for the week to end at a record high (2439.07). Nasdaq led major averages Friday (+0.94%) and for the week (+1.54%). Small caps beat mid and large (Russell indexes).
  • Tech drove Friday’s gains, led by semis and software. Financials hit by lower rates and yield curve flattening post jobs miss. Energy was the biggest decliner on falling oil prices.
  • Weaker dollar helped COMEX gold Friday (+0.8%) but not WTI crude oil (-1.4%)
  • 10-year yield dipped 0.06% to 2.15%, lowest closing level of 2017 and lowest since just after the election
  • Friday miss on U.S. nonfarm payrolls unlikely to sway Fed next week (details below)
  • Defensive tilt to weekly performance. Telecom topped weekly sector rankings, followed by healthcare. Oil fell > 4%; 10-year Treasury yield dropped 0.10%.

Overnight & This Morning

  • Stocks in Asia mostly lower amid relatively light news
  • In Europe, shares down (Euro Stoxx 600 -0.2%), continuing Friday slide
  • Weak sentiment after more terrorist attacks in London over the weekend
  • Euro up 0.3% to $1.12
  • Commodities – Mostly lower, led by weakness in industrial metals and energy, with WTI oil near $47/bbl. COMEX gold (0.3%) adding to Friday’s gains at $1283, copper (-0.7%)
  • U.S. stock, Treasury yields up slightly.
  • U.S. dollar mixed vs major currencies


Key Insights

  • Goldilocks environment. Steady but not booming job gains and inflation leveling off suggests economy is not too hot, not too cold. Wage gains are benign-average hourly earnings +2.5% YoY in Friday’s May jobs report. We’ve seen a mixed set of data recently: soft Q1 GDP, Q2 tracking near +3%, and earnings looking good. The Fed Beige Book cited most Fed districts continue to expand at a modest or moderate pace. Sounds like Goldilocks.
  • Any concern that the Fed may be behind the curve are misplaced, at least for now. The market is only pricing in a 44% chance of another rate hike in 2017 (after one in June), and just one hike in 2018.
  • An expensive stock market can stay expensive. The 17.7 times forward price-to-earnings (P/E) multiple, where it stood in early 2015, is more reasonable than the trailing PE (20.7) for the S&P 500 but is still at the high end of the historical range. We reiterate valuations are not good predictors of near-term stock market moves, an important message for clients.

Macro Notes

  • Jobs miss doesn’t mean Fed pause. The economy added 138K new jobs in May, well below consensus expectations of 185K, with additional downward revisions for March and April; unemployment rate edged lower to 4.3% from 4.4% on lower labor participation rate. The report may give the Fed some pause, but given the overall backdrop a June hike remains far more likely than not.
  • The China Caixin Manufacturing PMI index was below 50 when reported last week, but overnight the services PMI was 52.8, much better than last month’s 51.5. The overall composite number of 51.5 suggests a continued, but slowing, expansion in the Chinese economy. We expect the government to continue to try to reduce leverage in the economy, but not to engage in any major reforms until after the Communist Party meeting this fall.


  • Politics and central banks highlight the week ahead. Politics and central banks highlight the coming week, with Thursday, June 8 of particular importance as it brings the U.K. general election, the European Central Bank (ECB) meeting, and testimony of former FBI Director James Comey. Data of note in the U.S. includes durable goods and Services Institute for Supply Management (ISM). Overseas, Eurozone and Japan Gross Domestic Product (GDP), and Chinese inflation and money supply data are due out.


  • Nonfarm Productivty (Q1)
  • Unit Labor Costs (Q1)
  • ISM Non-Mfg. Composite (May)
  • Factory Orders (Apr)
  • Durable Goods Orders (Apr)
  • Cap Goods Shipments & Orders (Apr)
  • UK: Markit/CIPS UK Services PMI


  • Eurozone: Markit Eurozone Services PMI (May)


  • Eurozone: GDP (Q1)
  • Japan: GDP (Q1)
  • Japan: Current Account Balance (Apr)
  • Japan: Trade Balance (Apr)


  • Germany: Industrial Production (Apr)
  • UK: General Election, 2017
  • ECB: Draghi
  • Japan: Machine Tool Orders (May)
  • China: CPI & PPI (May)


  • Wholesale Sales & Inventories (Apr)
  • France: Industrial Production (Apr)
  • UK: Industrial Production (Apr)
  • UK: Trade Balance (Apr)
  • China: Money Supply and New Yuan Loans (May)






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

Tragedy in Paris

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Our thoughts are with the victims of Friday’s terrorist attacks in Paris. Events like this stir up many powerful emotions, including anger, fear, sadness, confusion, and regret, and these emotions are not easily suppressed. It is difficult to shift our attention away from this tragedy and toward the financial markets in times like this, but it is our responsibility to do so. Here we look at the potential stock market impact of Friday’s tragedy. As this commentary is being written, the S&P 500 is solidly higher in midday trading, with some speculating that terrorist threats mean the Federal Reserve (Fed) may not raise interest rates next month (though we still see a December hike as likely based on what we know now).


Regardless of the circumstances when making market forecasts, looking back in history to find similar conditions or events is always part of our process. In this case, unfortunately, we have many terrorist attacks in recent history to look at for a sense of how stocks might react.

Below is a list of events going back to the early 1990s and how stocks performed after these events [Figure 1]. The data are encouraging, as stocks perhaps benefited from the wave of patriotism or, in some cases, possibly the spending associated with the military response. The limited economic disruption from most of these events—with 9/11 a clear exception—is consistent with the generally muted stock market reactions.

These events occurred at different points in market cycles, and certainly other factors influenced stock market movements during these periods; but nonetheless, the stock market’s performance after these 17 events over the past 23 years suggests any related weakness in stocks may be short-lived.

It is logical to think defense stocks would get a boost from these events, but the data are mixed. These stocks do no better, on average, than the market during the week and month following the events (they are largely flat). However, the group (represented by the S&P 500 Aerospace & Defense Industry Group) has done better than the S&P 500 over the subsequent three months, gaining an average of nearly 8% compared with the S&P 500 gain of about 4%. Correlation is possible, but the muted short-term reaction suggests these results may not be meaningful.

It is also possible that oil prices may get a bump from the heightened geopolitical risk in the Middle East (West Texas Intermediate Crude Oil is solidly higher in midday trading); although, given how well supplied the global oil markets are currently, we would expect the impact to be relatively limited.

Finally, as has occurred in previous attacks, travel- and leisure-related stocks that are most impacted by travel restrictions may experience additional weakness in the coming days and weeks. Some weakness in these segments is evident in European markets today.


Here are some of our thoughts on potential political impacts from the intensifying global war on terror: U.S. election. Voters recognize that the war on terror is a global fight, and just because the latest attack occurred in Europe does not mean terrorism is not a risk for U.S. citizens. Accordingly, immigration and national defense, which were already key issues for the Republican presidential candidates, are even bigger issues now and could easily sway Republican primary voters in February 2016. Generally, the Republican Party is considered stronger on defense, while likely Democratic candidate Hillary Clinton has foreign policy experience as former Secretary of State.

European elections. This event may also alter elections in Europe, with more hardline governments, with respect to immigration, having greater influence. Populist and Nationalist parties have been gaining support across Europe based on their stances on immigration and European integration. To the extent these issues impact—or even dominate—political conversations, additional uncertainty is created around economic policies that may heighten market volatility.

Defense spending. The military response has begun, with France bombing Islamic State targets in Syria over the weekend. The U.S. and most, if not all, G20 nations will provide support of some kind for this fight and, even though the war on terror was already well underway, the response will likely put additional upward pressure on defense spending. The G20 meetings over the weekend were dominated by discussions of a global coordinated response.


While we mourn those who lost their lives in Friday’s terrorist attacks, we also do our best to help you navigate a challenging investment landscape. In this case, a look back at history for perspective offers reassurance. Still, as always, we remain watchful for risks that may warrant a change in our asset allocations. We see further modest gains ahead for stocks in the months ahead as the U.S. economy and corporate profits improve, but we acknowledge that geopolitical risk may contribute to heightened near-term stock market volatility.

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

(Source: LPL)

How Economies Pick Up and Move On After Terrorist Attacks

People read victims' names at the 9/11 Empty Sky memorial at sunrise in Liberty State Park in Jersey City, N.J., on September 11, 2015.


 If there is any good news for France after the horrific violence in Paris on Friday, it’s that terrorists generally aren’t able to destroy the economies of the countries where they strike. Societies are resilient, and people can soon get back to doing business after attacks like this one. The purely economic consequences of recent terrorism have been limited and temporary.

Several researchers at universities and in the private sector have tried to quantify the costs of the terrorist attacks in the United States on Sept. 11, 2001. Their estimates range from about $50 billion to $100 billion, less than 1 percent of the total U.S. economy.

The New York City comptroller put the immediate damage at $21.8 billion in New York, including the destruction of buildings, infrastructure and property and the costs of medical care. The income that those killed in the attack would have brought to the city in the remainder of their careers, had they survived, totaled another $8.7 billion.

The attacks were also costly for specific sectors of the economy. The unexpected claims on insurance companies were largely absorbed by reinsurance firms, such as Swiss Re, which put the total cost to the industry between $30 billion and $58 billion. Following the attacks, insurers generally stopped offering policies that covered losses due to terrorism, and these days, the costs of insuring against terrorism are subsidized by the federal government.

Also, the global airline industry lost $11.8 billion in 2001, canceling out its profits from the previous year, and carriers didn’t start making money again until three years later.

The economy, though, recovered quickly from these immediate costs. A federal report estimated that the rate of economic growth was half a percentage point lower in 2001 than it would have been had the attacks been foiled, and 598,000 more people were out of work. Businesses had adopted a “wait-and-see” attitude, putting off new hiring and investment until after the ramifications of the attack became clear. They made up for lost time the next year, though, aided by the economy’s overall recovery from a recession that had begun before the terrorist attacks when the price of technology stocks collapsed.

In the long term, the Bush administration’s responses to the attacks — increased security at home and the invasions of Afghanistan and Iraq — were far more costly in an economic sense than the attacks themselves, according to economists Adam Z. Rose and Brock S. Blomberg.

“We, rather than the perpetrators, are the major determinant of the consequences of a major terrorist attack,” they wrote.

The attacks on New York City and the Pentagon are also likely to be far costlier financially than last week’s attacks in Paris. Nearly 3,000 died on Sept. 11, 2001, while the toll of Friday’s assault in Paris is currently 129.

The terrorists in Paris did not manage to destroy skyscrapers or passenger jets. Their strategy was a contrast with the attacks on the World Trade Center, which was calculated to cause economic harm, said Walter Enders, an economist who recently retired from the University of Alabama.

“They didn’t go to the heart of Paris,” said Enders, predicting that tourism in Paris would not be affected. “They didn’t hit the Eiffel Tower. They didn’t hit anything on the Champs-Élysées. They didn’t hit Notre Dame.”

An attack more like the one in Paris on Friday occurred in Madrid in 2004, when terrorists bombed commuter trains, killing 191 people. Researchers at the Complutense University of Madrid concluded that the costs of that attack were equivalent to 0.03 percent of Spain’s economy.

Written by Max Ehrenfreund of The Washington Post

(Source: The Washington Post)