Market Update: May 30, 2017


Last Week’s Market Activity

  • S&P 500 Index and the Nasdaq closed at new record highs last Friday; seventh consecutive gain for S&P 500 and 20th record close year to date.
  • The combination of positive sentiment and low volatility suggests stocks may continue to absorb challenging headlines.  Investors weathered potential risks from last week’s news, including: fallout from Comey firing, growing investigation into Administration/Russia ties, White House’s 2018 budget proposal, terrorist bombing in Manchester, Moody’s China debt downgrade, CBO’s score for AHCA, and minutes from last Federal Open Market Committee (FOMC) meeting suggesting higher interest rates ahead.
  • Markets also handled disappointing economic reports, specifically weakness in new home sales, durable goods orders; instead focusing on longer-term trends such as positive global data (Germany, Japan), upward revision to U.S. gross domestic product (GDP) in the 1st quarter.
  • Orders for durable goods fell in April, but good news in the details. Drop (-0.7%) in orders bested expectations (-1.0%) and March revision was strong (details below).
  • Orders ex-transportation showed a similar pattern. Nondefense capital goods shipments ex-air, a proxy for business spending, fell slightly (-0.1%) but better than forecast, following four consecutive monthly gains.
  • For the week, stocks rose +1.5% to +2.0%, powered higher by the unusual combination of utilities and technology sectors, each up >2.0%.  Investors likely hedging their bets, counting on growth prospects of technology, but not necessarily buying into Fed’s rate outlook as “bond proxy” utilities sector rose.
  • Weakness in energy (-2.0%) as markets appeared to have already priced in extension to OPEC production cuts, but investors wanted deeper cuts and pushed WTI crude oil down by >1.5% last week (after rising for three weeks) to ~$49.00/bbl.
  • Action in U.S. Treasury market also points toward less Fed activity after expected June hike, with 10-Year Treasury yield hovering in the 2.25% range, on track for fourth straight monthly gain.
  • U.S. dollar firmed slightly (+0.1%) on the heels of solid GDP revision.
  • Stocks in Europe basically flat Friday; euro & pound sterling weakened as Conservatives’ lead over Labour has narrowed considerably in recent weeks.
    Emerging markets stocks +2.0% on the week, maintaining year to date leadership globally.

Overnight & This Morning

  • Stocks in Asia little changed amid shortage of overseas leads.
  • Yen strengthened for a third day against the U.S. dollar (USD/JPY -0.3% to 110.9)
  • In Europe, shares down fractionally (Euro Stoxx 600 -0.1%); bank stocks, weakness in business & consumer confidence weighing
  • European Central Bank (ECB) Head Draghi was critical of U.S. trade proposals in speech to European Parliament yesterday.  He also reaffirmed commitment to maintaining ECB stimulus, placing pressure on the euro.
  • Euro down -0.1% to $1.11
  • Commodities – Mostly lower, led by weakness in precious metals and agriculture, with WTI oil holding below $50.00/bbl. COMEX gold (-0.2%) to $1265 and copper (-0.6%).
  • U.S. stock, Treasury yields down slightly in muted, post-holiday trading.
  • U.S. dollar weak vs. yen but stronger vs. euro and other major currencies
  • U.S. Personal Income and Spending for April met expectations after two consecutive shortfalls. Inflation metrics in this report are. Its preferred measure of price growth, the Core PCE deflator, key inflation metric for the Federal Reserve, at 1.7% from 1.6%.


Key Insights

  • The trend for business spending/capital investment is improving.  After years of hoarding cash, paying yield, and buying back shares, the business cycle has returned with upward shifts in pricing and U.S. monetary policy.  Businesses can no longer simply attempt to maintain market share, but rather, they must grow market share as the recovery/expansion enters its ninth year.
  • While personal consumption is still the primary driver of U.S. economic growth, we believe the rate of growth in the coming quarters/years will be driven by capital investment, which is taking up a larger portion of GDP contribution (details below).
  • 1Q earnings per share (EPS) (+15% year over year) faced the easiest comparisons and we look for remainder of 2017 quarterly EPS gains to hover in the mid-high single digit range. These are smaller percentage gains than what we’ve become accustomed to these past couple of quarters, but still indicative of sustained, late cycle growth accompanied by still low interest rates and inflation (details below).
  • We recognize current trading range is of concern. Despite the flattening yield curve, which could partly be the result of global sovereign credit valuations, there appears to be little stress evident in the credit markets (details below).

Fixed Income Notes

  • Despite equity markets at/near record levels, bond market continues to hang in there.  Constant maturity 10-year Treasury note up four consecutive months, Barclays Aggregate (+2.0%) and Barclays High Yield (+4.0%) providing positive returns year to date.
  • After 1.35% low last June, 10-year Treasury yield surged to 2.65% in late February/early March of this year. Since then, several factors have conspired to push yields lower, despite Fed’s plans to raise interest rates (see below). First, failure of the first vote on ACA repeal placed a great deal of uncertainty on likelihood of President Trump’s pro-growth policy agenda being fully enacted. Second, weak Q1 GDP enabled flattening of the yield curve. Third, some are projecting higher short-term borrowing costs will curb lending and growth, making it tougher for Fed to sustain 2.0% inflation target. Fourth (less sinister) reason has to do with relative valuation.  With Fed moving in a different direction from ECB and BOJ, those sovereign bonds trading at very expensive valuations, increasing attractiveness of U.S. government bonds.
  • This can be a blessing and a curse: curse is that a bid for U.S. Treasuries from global investors helps mask our spending profligacy. The blessing is global investors appear confident slow growth with low inflation likely to be sustained in U.S., without signs of excessive upside, or downside risks.
  • As a result, we continue to look for the U.S. benchmark Treasury yield to trade within the 2.25% to 2.75% range in the second half of 2017.
  • Corporate credit spreads (high yield & investment grade) remain narrow, credit default swaps (CDS) also held steady. If these critical market signposts (10-year Treasury yield, credit spreads, CDS) hold steady, financial markets likely to continue narrow trading range
  • Geopolitics may periodically cause near term uncertainty, but like equity markets, next catalyst likely move the bond market will be clarity on U.S. fiscal policy

Macro Notes

  • S&P 500 currently at another record level, 2415, but technicals suggest move to 2450-2475 within reach in coming months.
  • Bullish catalyst is necessary, could come in the form of: sustainable EPS growth, > expected GDP in Q2/Q3, less aggressive Fed in 2H17, corporate tax cuts, tax reform, global GDP etc.
  • Unfortunately, move of this magnitude highly dependent on fiscal policy changes, where uncertainty narrows trading ranges until clarity emerges.
  • Fundamentally, move toward this level can be justified, but anything above it would need more clarity on 2018 EPS increases, largely due to combination of repatriation tax holiday/reduction in corporate tax rate.
  • Assuming $130.00 in S&P 500 operating EPS this year, stocks currently trading ~18.5x calendar 2017; a move >2450 would take market price-to-earnings ratio (P/E) >19x.
  • Tax reform may be too big to achieve in current political environment, but corporate tax cuts still possible; if implemented, 2018 EPS could be >$140.00, which would bring target ranges for index 2500 to 2550 in 12 to 18 months
  • U.S. Q1 Real GDP revised higher from +0.7% to +1.2%, helped by a more positive picture of business investment, which had already posted a strong quarter, and a slightly better picture of consumer spending. The improvement alleviates some concerns of Q1 weakness and increases the likelihood of a Fed rate hike in June. Looking at Q2 GDP, prospects are for much stronger growth, and could be in the +3.0%, as pent up demand in cap-ex, housing, and an inventory rebuild from Q1 weakness propels GDP higher.
  • Though components of the durable goods report (airlines, transportation) can be volatile, the trend over the past year for orders (business investment) is still up approximately +5.0% year over year, despite last month’s weakness
  • A host of European economic data was released overnight, generally showing that the economic recovery continues, but at a somewhat slower pace than expected. The highlighted number was German inflation, running at 1.4%, below forecast and previous readings of 2%, which is also the ECB target rate. This data reduces some pressure on the ECB to alter its current monetary policy.
  • Politics continue to foil plans for European certainty. Just three weeks ago, the election of a Conservative government in the U.K. was seen as both a certainty and a boost for Prime Minister Theresa May. In the past few weeks, a Conservative victory, while still likely according to the polls, is now less certain. The British pound has also weakened, not coincidentally. In addition, there have been renewed calls for an early election, as soon as September 2017, as opposed to the 2018 election now expected. An early election would likely focus directly on the EU and the euro.
  • Corporate Beige Book supports strong earnings outlook. Much like first quarter earnings results and management guidance, our measure of corporate sentiment based on our analysis of earnings conference call transcripts was better than we expected. We saw a sharp increase in strong and positive words over the prior quarter, with no change in weak and negative words. Wwe believe the positive tone from management teams supports a favorable earnings outlook in the quarters ahead.
  • New highs and no volatility, more of the same. The S&P 500 Index closed at another new high on Friday, making it seven consecutive higher closes. It hasn’t been up eight days in a row since July 2013 and the previous two seven day win streaks ended at seven days. It also gained 1.4% for the week, avoiding its first three week losing streak since before Brexit. Last, the incredible lack of volatility continued, as the S&P 500 Index traded in a range of only 0.19% on Friday, the smallest daily range since March 1996 and the smallest daily range while also closing at a new all-time high since August 1991.
  • June is a busy month for central banks. Summer is nearly here and historically that has meant lower volume, but potential market volatility. As we turn the calendar to June, the three big events this month are all from central banks: as the Fed, the ECB, and the BOJ all have meetings to decide interest rate policy. These events, along with a few others, could make for an eventful month in June.



  • Memorial Day Holiday
  • Eurozone: Money Supply (Apr)
  • Japan: Jobless Rate (Apr)


  • PCE (Apr)
  • Conference Board Consumer Confidence (May)
  • France: GDP (Q1)
  • Germany: CPI (May)
  • Eurozone: Consumer Confidence (May)
  • Japan: Industrial Production (Apr)
  • China: Mfg. & Non-Mfg. PMI (May)


  • Chicago Area PMI (May)
  • Beige Book
  • France: CPI (May)
  • Germany: Unemployment Change (May)
  • Eurozone: Unemployment Rate (Apr)
  • Italy: CPI (May)
  • Eurozone: CPI (May)
  • India: GDP (Q1)
  • Canada: GDP (Mar)
  • Japan: Nikkei Japan Mfg. PMI (May)
  • China: Caixin China Mfg. PMI (May)
  • Japan: Capital Spending (Q1)


  • ADP Employment (May)
  • Non-Farm Productivity (Q1)
  • Initial Jobless Claims (May 27)
  • Markit Mfg. PMI (May)
  • ISM (May)
  • Eurozone: Markit Eurozone Mfg. PMI (May)
  • Italy: GDP (Q1)
  • Brazil: GDP (Q1)
  • South Korea: GDP (Q1)
  • Canada: Markit Canada Mfg. PMI (May)
  • Japan: Vehicle Sales (May)


  • Change in Nonfarm, Private & Mfg. Payrolls (May)
  • Unemployment Rate (May)
  • Trade Balance (Apr)
  • Eurozone: PPI (Apr)






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.

Weekly Market Recap: April 5, 2016

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The week in review

  • Consumer spending rose slightly, but the January numbers were revised lower
  • Consumer confidence improved in March
  • Jobless claims rose to 276,000
  • The ISM Manufacturing Index rose to 51.8
  • Private payrolls increased by 215,000
  • The unemployment rate inched higher to 5.0% on the back of stronger participation

The week ahead

  • International trade
  • ISM Non-manufacturing index
  • FOMC minutes
  • Jobless claims

For more information please visit the Source below.

(Source: JPMorgan)

Fasten Your Seat Belts, Because There’s Turbulence Ahead in the Stock Market

Saul Loeb/Getty Images

Talk about a nice ride: The S&P 500 Index of the biggest U.S. stocks is now up over 9% since I suggested buying equities Feb. 9 because the stars were aligned.

But all good things come to an end. Now it’s time for momentum investors and traders to take some money off the table. If you have a longer time horizon, hang in there because the likely weakness in stocks just around the corner won’t signal the end of the bull market.

The U.S. economy is too strong for that. A recession is just about the only thing that will kill this bull. Economic expansions just don’t die of old age, as recent Federal Reserve research confirmed.

However, there’s going to be some near-term volatility over the next few days or weeks, possibly touched off by nervousness about the upcoming Federal Open Market Committee meeting March 15-16.

Of course, I could be wrong, but here are six reasons why you should expect near-term downside volatility.

1. This has been a narrow rally

For market reversals to sustain, they need broad participation by lots of stocks and sectors, also known as broader breadth. So far, that’s not the case, says Bruce Bittles, chief investment strategist at Robert W. Baird & Co., a brokerage. That could change. But until it does, this rally is suspect.

2. Stocks no longer look so cheap

The forward price-to-earnings multiple for the S&P 500 SPX, +0.02%  fell to the lower-14 range during the worst of the selloffs in January and February, and last August and September. Now it is back above 16. Historically when stocks are priced at this level, gains are harder to come by.


That’s likely to be the case now, given that earnings growth has weakened, and worries about U.S. and global growth could return. “Valuation multiples aren’t cheap,” says Ed Yardeni, of Yardeni Research. “We wouldn’t be surprised by a near-term retreat.”

3. Rate hikes could easily spook investors

A few months ago when Federal Reserve officials hit the speaking circuit to predict four rate hikes this year, stock investors panicked and dumped stocks.

For the moment, Fed rate-hike fears have eased. But good U.S. growth, and labor market tightness, could easily ramp up inflation fears at the Fed, bringing back investor angst about interest-rate increases.

Especially since we now know, as I’ve been saying all along in my stock newsletter, Brush Up on Stocks, that the U.S. is not going into recession in the near term. Recent economic data confirm a recession is not in the cards.

True, we seem to have just gotten a big break from inflation worries. That came in the form of weak wage growth numbers in Friday’s employment report. But that might be a one-off event.

After all, Costco Wholesale Corp. COST, -0.12% didn’t just lift its starting pay for the first time in nine years — by $1.50 an hour to $13-$13.50 an hour — just for the fun of it. Managers there are obviously having a harder time finding workers.

And while stock investors partied, several markets showed concern about inflation even after those weak wage numbers, notes James Paulsen, an economist and strategist at Wells Capital Management.

He cites the strength in gold, for example, which is often seen as an inflation hedge. Sectors that benefit from inflation, like energy, materials and financials, outperformed. Bond yields also continued their upward move after the weak wage numbers. This told us that bond investors were not calmed by those weak wage numbers. (Investors sell bonds, driving up yields, when they think interest rates are going up.)

A lot of people have been lulled into complacency about inflation because the headline Consumer Price Index (CPI) has been anemic. This is a bit of an illusion because weak energy prices have held the CPI down. Now, with oil so much higher, the balm of low headline CPI inflation may go away. Core inflation, excluding food and energy, is already pretty robust. It’s above 2%.

To be clear, inflation-induced Fed rate hikes don’t have to kill the bull, as long as economic growth is OK. But, near term, a return of Fed rate hike worries could spook investors.

4. High-yield bond investors still smell trouble

Lawrence McDonald, in an investment letter called The Bear Traps Report, likes to look to high-yield bond investors for signs of potential trouble.

Unlike stock investors, high-yield investors don’t think everything is OK again. This is one reason McDonald raised cash as stocks rallied last week.

“We went to the highest percentage of cash that we have had since 2011,” says McDonald, author of the New York Times bestseller “A Colossal Failure of Common Sense: The Inside Story of the Collapse of Lehman Brothers.”

His reasoning: The price of credit-default swaps on high-yield bonds, a kind of insurance against default, was recently nearly twice as high as the prices seen during calmer times when there was less risk in the markets. Likewise, investment-grade credit-default swaps are expensive.

“With the S&P 500 near all-time highs, high-yield bonds and investment-grade bonds are nowhere near all-time highs,” says McDonald. “Credit has improved, but it’s nowhere near where it should be. The high-yield market is still signaling trouble.”

5. Currency market points to risks ahead

When investors in Asia are worried about China, they seek refuge in the yen and yen-denominated investments, says McDonald, of the Bear Traps Report. That drives up the value of the yen against the dollar. So the yen can serve as a good fear gauge.

Recent yen strength signals investors are worried about China. The yen recently traded at about 1.13 against the dollar, compared with weaker levels of 1.18-1.24 for much of last year. “The dollar-yen exchange rate is telling us that China is not out of the woods yet,” says McDonald.

China-related risks include further yuan devaluation, a continued slowdown in economic growth, or problems at Chinese banks because of bad debt.

6. Investor sentiment is improving

To be sure, investor sentiment is still pretty bleak, and this is bullish in the contrarian sense. But investor sentiment has risen a lot from the lows of mid-February. There are even a few pockets of complacency, says Bittles, the chief investment strategist at Robert W. Baird.

He cites the decline in demand for puts options. Put options can be a bet on market declines, so declining demand reflects rising sentiment. He also points out the CBOE Volatility Index VIX, -1.58% a kind of fear gauge, has fallen dramatically. It traded recently at about 17, compared with 25-32 when investor panic was in full bloom in mid-February and mid-January.

The recent stock market rally “has left an increasing number of stocks, sectors and the market itself in overbought territory,” he concludes.

Written by Michael Brush of MarketWatch

(Source: MarketWatch)

Weekly Market Recap: February 17, 2016

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The week in review

  • Job openings up to 5.6 m
  • Retail sales up 0.2% m/m
  • Import prices down 6.2% y/y
  • Export prices down 5.7% y/y
  • Business inventories up 0.1% y/y
  • Consumer sent. down to 90.7

The week ahead

  • Housing starts
  • Final demand producer prices
  • Empire State mfg. survey
  • Philly Fed survey
  • FOMC minutes
  • Consumer price index

For more information please visit the Source below.

(Source: JPMorgan)

Weekly Market Recap: February 2, 2016

Screen Shot 2016-02-02 at 4.24.20 PM

The week in review

  • Home prices increased in Nov.
  • Pending home sales increased 0.1%
  • Durable goods orders fell 5.1% m/m
  • Flash Services PMI down to 53.7
  • Consumer confidence up to 98.1
  • Consumer sentiment down to 92.0
  • New home sales increased to 544k
  • ECI increased 0.6% in 4Q15

The week ahead

  • Personal income
  • Mfg. and Non-Mfg. PMIs
  • Light vehicle sales
  • Dec. ADP and BLS employment
  • International trade

For more information please visit the Source below.

(Source: JPMorgan)

Weekly Market Recap: January 12, 2016

Screen Shot 2016-01-12 at 3.05.15 PM

The week in review

  • Markit and ISM Mfg PMIs lower
  • Services PMIs lower, but solidly >50
  • Light vehicle sales were 17.2m
  • ADP employment increased 257k
  • Trade deficit improved to -$42.4bn
  • Payrolls increased 292k

The week ahead

  • NFIB survey
  • Job openings
  • Import prices & PPI
  • Retail sales
  • NY Fed survey
  • Industrial production
  • Consumer sentiment

For more information please visit the Source below.

(Source: JPMorgan)

Yahoo Shares Spike on Report Company May Sell Core Assets

Provided by CNBC

Shares in Yahoo jumped 5.6 percent in after-hours trading on the back of a Wall Street Journal report that the troubled company’s board was mulling the sale of its core Internet business.

The WSJ reported that Yahoo’s board would hold a series of meetings from Wednesday to Friday, where it would discuss whether to proceed with the spin-off of more than $30 billion in Alibaba shares, hoist a for-sale sign over Yahoo’s core online businesses or both.

Shortly after the report, more than 300,000 Yahoo shares changed hands, pushing the stock up 5.6 percent to $35.60. The shares had closed near flat at $33.71.

Yahoo chief executive Marissa Mayer is now in the fourth year of her turnaround effort, which faces headwinds ranging from the departure of key executives to uncertainty over the taxation of the massive Alibaba spin-off.

Yahoo declined to comment on the report.

Written by CNBC

(Source: CNBC)

Weekly Market Recap: November 30, 2015

Screen Shot 2015-11-30 at 3.39.27 PM

The week in review

  • Existing home sales were 5.36m
  • 3Q15 Real GDP up to 2.1%
  • Flash Mfg. PMI down to 52.6
  • Consumer confidence sank to 90.4
  • Durable goods improved 3.0% m/m
  • New home sales up to 495k

The week ahead

  • Pending home & vehicle sales
  • Markit & ISM Mfg. PMI
  • Markit & ISM Non-Mfg. PMI
  • ADP Employment & Payrolls
  • Trade deficit

For more information please visit the Source below.

(Source: JPMorgan)

Weekly Market Recap: November 16, 2015

Screen Shot 2015-11-16 at 3.24.54 PM

The week in review

  • Import prices -10.5% y/y
  • Export prices -6.7% y/y
  • Job openings 5.5 M
  • Retail sales +0.1% m/m
  • Producer prices final demand -1.6% y/y
  • Business inventories +0.3% m/m
  • Consumer sentiment 93.1

The week ahead

  • CPI
  • Industrial production
  • Housing starts
  • Philly Fed survey


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

(Source: JPMorgan)

Chart of the Week: November 2, 2015

Screen Shot 2015-11-02 at 4.45.20 PM

At first glance, the 1.5% q/q saar initial estimate of 3Q real GDP growth does not send a positive message about the health of the U.S. economy. However, this headline number is masking strength in key underlying areas, mostly notably the consumer. Final demand, growth excluding inventory changes, increased 3.0% led by a 2.2% gain in consumer spending. This follows a solid 2.4% increase in 2Q and reiterates the continued strength in the U.S. consumer. Business and residential investment added an incremental 0.3% and 0.2%, respectively, and government spending increased 0.3% primarily due to state and local governments. Even with the stronger dollar and slowdown in China, foreign trade resulted in a minimal 0.03% drag, much less than expected. A large inventory build-up in the first half of the year is the culprit behind the lower headline number, shaving 1.4% from an otherwise steady growth rate. It is worth noting that while this inventory stockpile could impact coming quarters, most of the damage is behind us given that it would require only an additional 0.6% drag on annualized GDP to get back to the average pace of inventory accumulation. Despite the inventory correction, fundamentals in the U.S. economy remain strong and the expansion continues, albeit at a moderate pace.

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

(Source: JPMorgan)