Market Update: May 22, 2017

MarketUpdate_header

Last Week’s Market Activity

  • After hitting a new record on Tuesday, the S&P 500 Index sold off -1.8% Wednesday on fears the growing controversies around the Trump Administration will cause a delay in the pro-growth policy agenda, including tax reform, deregulation and infrastructure spending.
  • Stocks stabilized on Thursday and Friday, recovering ~1.0%, but pared gains both days going into the close of trading.
  • For the week, major U.S. equity indexes fell ~-0.5% as investors’ focus switched from political headline risks to positive fundamentals supporting economic and profit growth.
  • Financials were the worst performing sector (-1.0%) on the week, followed by industrials (-0.3%); defensives and dividend paying sectors in favor, with real estate (+1.2%), consumer staples (+0.5%) and utilities (+0.5%) leading.
  • The yield on the 10-year Treasury held steady around 2.24%, while the U.S. dollar lost -1.6% for its worst week since July.
  • Despite expectations for a June rate hike, the market does not fear an aggressive stance by the Federal Reserve (Fed).
  • COMEX Gold was +2.0% on the week; copper also climbed 2.0% Friday.
  • WTI crude oil rose +2.0% to $50/barrel on Friday, +5.0% on the week in anticipation of further Organization of the Petroleum Exporting Countries (OPEC) production cuts at meeting in Vienna on 5/25.

Overnight & This Morning

  • Stocks in Asia were mostly positive as MSCI EMG had biggest climb (+0.90%) in two weeks, led by commodity producers.
  • North Korea fired another missile, yet Korean won moved higher on naming of new finance minister.
  • Japanese shares were boosted by weaker yen and exports rose for a 5th consecutive month in April, up 7.5% year over year.
  • Hong Kong’s Hang Seng closed at its highest level since July 2015.
  • Australian stocks rose despite S&P reducing credit ratings for many of their banks on concerns over property prices and potential rise in credit losses.
  • In Europe, shares were up ~0.2% with gains in real estate, energy and mining shares.
  • German bunds slipped to 0.38% on the 10-year and euro held around $1.11.
  • European Union ministers are meeting in Brussels to discuss Greek bailout and refine plans for Brexit negotiations.
  • In UK election, the Tory lead over Labour has narrowed considerably, from almost 20 points last month to just 10 points this morning.
  • Commodities – WTI crude oil +0.9% to $51.10/barrel; COMEX gold slipped to $1254/oz. while copper is higher by 0.20%.
  • Major U.S. indexes up slightly along with Treasury yields as investors judge recent selloff on political turmoil may have been excessive.

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Key Insights

  • U.S. fiscal policy needs to become primary growth driver for 2018. President Trump releases his administration’s budget plans Tuesday, including economic projections and spending plans for federal agencies and entitlement programs. Congressional Republicans must first agree on a budget if they want to achieve tax reform this year; intraparty fighting must cease if Republicans want to maintain majority after next year’s midterms. History is littered with examples of “wave” elections after one party assumes power. However, if Republicans see an expiration date on their majority; similar to Democrats in 2010 and Republicans in 2006, these developments may result in more legislation passing. We are likely to see an infrastructure plan in the coming weeks and the Senate appears to have progressed on tax reform plan, which doesn’t include BAT or removal of corporate interest deduction.
  • Despite paring losses Thursday and Friday, risk-off vibe still apparent with dollar weakness, yield curve flattening, VIX higher, and bank, small cap and transport stocks all underperforming. However, there is little stress evident in U.S. credit markets with credit default swaps, investment grade and high yield spreads all contained. The economy continues to benefit from pent up demand in capital expenditures, housing and an inventory rebuild from a Q1 drawdown.

Macro Notes

  • Unofficial last week of an excellent earnings season. With just 28 S&P 500 companies left to report results, S&P 500 earnings growth for the first quarter is tracking to a very strong +15.2% year-over-year increase, 5% above prior (4/1/17) estimates (thanks to a 75% beat rate), and +11.1% excluding energy. Technology jumped ahead of financials and materials last week into second place in the earnings growth rankings (energy is first), while industrials, energy and materials have produced the most upside to prior estimates. This week 19 S&P 500 companies are slated to report.

052217_earningsdashboard-01.png

  • Guidance may be the most impressive part of earnings season. We were very impressed that company outlooks were positive enough to keep estimates for the balance of 2017 firm, amidst heightened policy uncertainty and the slowdown in economic growth in the first quarter. Consumer discretionary, industrials, technology, financials and healthcare sectors have all seen consensus estimates for 2017 and 2018 rise, as has the S&P 500, over the past month; and consensus estimates reflect a solid 9% increase in earnings over the next four quarters versus the prior four.
  • This week, we try to help investors stay focused on fundamentals. Market participants became increasingly worried that the Trump administration’s agenda was in danger last week following the latest news surrounding the investigation into the Trump campaign’s ties to Russia. After its biggest one-day drop in nearly a year on Wednesday, the S&P 500 recovered nicely Thursday and Friday to end the week less than 1% off its all-time closing high. We don’t know what will happen with the Russia investigation, but we think we have a pretty good handle on the basic fundamentals of the economy and corporate profits, which look good right now, tend to drive stocks over time, and are where we think investors should be focused.
  • This week, we also take a look at inflation. With the unemployment rate unlikely to go much lower, Fed watchers are becoming increasingly focused on the other half of the Federal Reserve’s dual mandate, low and stable inflation. Despite disappointing gross domestic product (GDP) growth in the first quarter, consensus forecasts indicate expectations of better growth over the rest of the year, which would likely be accompanied by an uptick in inflation above the Fed’s 2% target. However, there are still many factors that limit the possibility of runaway inflation. Better growth would likely give us enough inflation for the Fed to follow through on raising rates twice more in 2017, but we don’t expect inflation to reach a level that would push the Fed to move faster.
  • What does the large drop on Wednesday mean? The S&P 500 Index fell 1.8% on Wednesday and has bounced back the past two days. Nonetheless, Wednesday was the worst one-day drop since September and given it happened within 0.5% of all-time highs, the question is: What does a large drop near all-time highs mean?

MonitoringWeek_header

  • This week’s domestic economic calendar includes data on preliminary purchasing manager surveys (manufacturing and services) from Markit, housing, trade, durable goods, and revised first quarter gross domestic product (GDP). The Fed will remain in focus with minutes from the May 3 Federal Open Market Committee (FOMC) meeting due out Wednesday (May 24) and several Fed speakers on the docket-a roughly even balance of hawks and doves. We believe the market is correctly pricing in a June 14 rate hike. Overseas economic calendars are busy with a series of data in Europe, including first quarter German and U.K. GDP, German business confidence, and Eurozone purchasing manager surveys; and in Japan (trade, manufacturing and inflation data). Political troubles in Brazil may continue to weigh on emerging market indexes.

 Monday

  • Chicago Fed National Activity Index (Apr)

 Tuesday

  • New Home Sales (Apr)
  • Richmond Fed Report (May)
  • Germany: GDP (Q1)
  • Germany: Ifo (May)
  • France: Mfg. Confidence (May)
  • BOJ: Kuroda
  • Japan: All Industry Activity Index (Mar)
  • Japan: Machine Tool Orders (Apr)
  • Japan: Nikkei Japan Mfg. PMI (May)

 Wednesday

  • Markit Mfg. PMI (May)
  • Markit Services PMI (May)
  • Existing Home Sales (Apr)
  • FOMC Meeting Minutes (May 3)
  • France: Markit Mfg. & Services PMI (May)
  • Germany: Markit Mfg. & Services PMI (May)
  • Eurozone: Markit Mfg. & Services PMI (May)
  • Canada: BOC Rate Decision (May 24)

 Thursday

  • Advance Goods Trade Balance (Apr)
  • Wholesale Inventories (Apr)
  • Initial Jobless Claims (May 20)
  • UK: GDP (Q1)
  • Italy: Industrial Orders & Sales (Mar)
  • Japan: CPI (Apr)
  • Japan: Tokyo CPI (May)

 Friday

  • GDP (Q1)
  • Personal Consumption (Q1)
  • Durable Goods Orders (Apr)
  • Capital Goods Shipments & Orders (Apr)
  • Italy: Business Confidence in the Mfg. Sector (May)
  • Italy: G7 Leaders Meet in Sicily

Saturday

  • BOJ: Kuroda

 

 

 

 

 

 

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: 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.

4-24-17-earnings-dashboard

  • 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 3, 2017

MarketUpdate_header

  • Stocks search for direction to begin Q2. After closing out a solid first quarter amidst Brexit and Trump-trade uncertainties, equities are modestly lower in early trading. Friday’s session saw the S&P 500 (-0.2%) and the Dow (-0.3%) finish in the red, ending the quarter without enthusiasm despite an overall increase of 5.5% for the S&P. Rate-sensitive real estate (+0.5%)  and utilities (+0.3%) won the sector battle for the day as a number of Federal Reserve (Fed) presidents expressed interest in potentially reducing the Fed’s balance sheet; financials (-0.7%) was the worst performer. Overseas, the Hang Seng (+0.6%) and Nikkei (+0.4%) gained ground on strong regional Purchasing Managers’ Index (PMI) data; China’s Shanghai Composite was closed for a holiday. In Europe, the STOXX 600 Index (-0.2%) and most markets are lower. Meanwhile, WTI crude oil ($50.46/barrel) is down slightly, COMEX gold ($1253/oz.) is near flat, and the yield on the 10-year Treasury is down to 2.36%.

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  • Checking in on so-called Trump trades. Recent underperformance of small caps, financials, and industrials likely reflects some loss of confidence in the Trump agenda, although we believe small caps and financials may have enough going for them that the recent weakness may be a buying opportunity, even with a scaled-back policy path. Industrials, on the other hand, may need more help from the macroeconomic environment should policy disappoint.
  • Just missed five in a row. The S&P 500 lost 0.04% last month, after a late-day drop on Friday. This was the first monthly decline since October, just missing the first five month win streak since March-July 2016. It was still a great first quarter as the S&P 500 jumped 5.5%; the best return since Q4 2015 and the best Q1 since 2013. For the quarter, technology and consumer discretionary led, while telecom and energy lagged.
  • April is usually strong. Over the past 20 years, no month sports a higher monthly S&P 500 average than April at 2.0%. Going back to 1950[1], the average monthly return is 1.5%, with only the historically strong months of November and December better. Post-election years are also strong, up 1.6% on average. Lastly, after a big first quarter gain of 5% or more (like 2017), April actually does better at up 2.0% on average.
  • April is a big month. There are multiple potential market-moving events in April: the start of Q1 earnings season, elections in France, and a potential government shutdown head the list of things we are watching closely. To get ready for the big month, we will examine these events more closely.

MonitoringWeek_header

Monday

  • ISM (Mar)
  • Eurozone: Markit Mfg. PMI (Mar)
  • Eurozone: Eurostat PPI Industry Ex-Construction (Fed)

Tuesday

  • Eurozone: Eurostat Retail Sales Volume (Feb)

Wednesday

  • ISM Non-Mfg. (Mar)
  • Eurozone: Markit Services & Composite PMI

Thursday

  • Initial Jobless Claims (Apr)
  • Eurozone: Market Retail PMI (Mar)

Friday

  • Change in Nonfarm, Private & Mfg. Payrolls (Mar)
  • Unemployment Rate (Mar)
  • Average Hourly Earnings (March)

 

 

 

 

[1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

Important Disclosures: Past performance is no guarantee of future results. The economic forecasts set forth in the presentation may not develop as predicted. The opinions voiced in this material are for general information only and are not intended to provide or be construed as providing specific investment advice or recommendations for any individual security. All performance referenced is historical and is no guarantee of future results. All indices are unmanaged and cannot be invested into directly. Stock investing involves risk including loss of principal. 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: December 19, 2016

MarketUpdate_header

  • Stocks edge up to begin quiet week. U.S. markets are slightly higher in early trading, kicking off what is likely to be a low-volume week on scattered data releases ahead of the holidays; though a speech by Federal Reserve Bank (Fed) Chair Janet Yellen this afternoon will garner attention. Friday’s session saw the S&P 500 (-0.2%) slip into negative territory for the week, as the heavily weighted technology (-0.8%) and financials (-0.9%) sectors lagged; rate-sensitive utilities and real estate both moved up more than 1%, despite only a 1 basis point (.01%) drop in the yield on the 10-year Treasury. Overnight, Asian markets were modestly lower, led down by the Hang Seng (-0.9%) after China stated it would take measures to control asset bubbles in 2017; major European indexes are near flat in afternoon trading, with the STOXX Europe 600 down 0.1%. Finally, WTI crude oil ($52.70/barrel) is slightly lower, COMEX gold ($1,141/oz.) is rising by 0.3%, and the yield on the 10-year note is down to 2.55%.

MacroView_header

  • 2016 calendar winding down. Although there are a few key events on tap this week (i.e., a speech by U.K. Prime Minister Teresa May on Brexit, the Bank of Japan’s final policy meeting of the year, and Vladimir Putin’s only press conference of 2016), the calendar is fairly quiet. Data on new and existing home sales, the service sector Purchasing Managers’ Index (PMI) and durable goods orders and shipments are the key U.S. data releases. Overseas, China’s property price indices (released over the weekend) and the German IFO reading for December (released overnight) were the only key events.
  • A look back. As the year comes to an end, we take a look back at some of our hits and misses of 2016. We certainly had some of both in a difficult year to forecast equity markets. First, the year got off to one of the worst starts ever as oil prices collapsed. Then it was the unexpected outcome to the Brexit vote, which stocks largely shrugged off, followed by Trump’s upset, which was followed by one of the strongest post-election stock market rallies in history-outcomes few predicted. Among the hits, our stock market forecast and our decision to largely stay on the sidelines with regard to international equity markets. Misses included favoring large caps and growth.
  • Can we count on Santa in 2016? Since 1950, the S&P 500 historically has been flat from December 1 through 15, then rallies nicely into year end. Last week, we took a look at this bullish time of year and the well-known Santa Claus Rally. But what happens during rare years like 2016, when the S&P 500 has already seen nice gains (2.9%) as of the mid-way point of the month? Going back to 1950¹, we found there were only seven other months that were up on December 15 at least 2.75%. The good news? The rest of the month the S&P 500 gained another 1.8% on average and was higher all seven times.

MonitoringWeek_header

Monday

  • Markit Services PMI (Dec)
  • Yellen (Dove)
  • Germany: Ifo (Dec)
  • UK: PM Teresa May Makes a Statement on Brexit

Tuesday

  • Japan: Bank of Japan Meeting (No Change Expected)

Wednesday

  • Existing Home Sales (Nov)

Thursday

  • Leading Indicators (Nov)
  • Durable Goods Orders and Shipments (Nov)
  • Russia: President Putin Holds His Annual Press Conference in Moscow

Friday

  • New Home Sales (Nov)

 

 

 

 

 

 

¹ The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

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

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.

FactSet

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)

Alphabet Topples Apple to Become Most Valuable US Company

An Apple logo is seen at the Apple store in Munich, Germany, January 27, 2016.  REUTERS/Michaela Rehle
Michaela Rehle/Reuters

NEW YORK, Feb 1 (Reuters) – Alphabet Inc surpassed Apple Inc as the most valuable company in the United States in after-hours trading on Monday, knocking the iPhone maker from the top spot that it has held for the better part of four years.

The change may signal the passing of the technology baton to Alphabet – formerly known as Google – from Apple, which surged past Microsoft Corp in market value in 2010. Microsoft in turn eclipsed International Business Machines Corp two decades ago.

It is not without piquancy for Apple and Alphabet, which worked hand-in-hand to develop mobile computing, but fell out bitterly after Google launched its own Android mobile operating system in 2008. Google’s then-CEO Eric Schmidt left Apple’s board the following year.

The two companies’ operating systems and apps are in direct competition with each other and Apple is still in litigation with Samsung Electronics, the biggest Android smartphone maker.

Alphabet shares jumped 6 percent on Monday after reporting strong quarterly earnings after the bell, making its combined share classes worth $554 billion, compared with Apple, which had a value of about $534 billion. Apple shares dipped last week after reporting the slowest-ever increase in iPhone shipments and forecasting its first revenue drop in 13 years.

Alphabet will officially overtake Apple in market value if the two companies’ shares open around current levels on Tuesday.

The Internet powerhouse’s stock has surged in the last year, helped by increasing sales of advertising on mobile devices, while Apple has struggled due to signs of softening demand for its signature phone, especially in China, and the lack of another blockbuster product in its pipeline.

“This makes Alphabet an even stronger bellwether for investors to watch,” Scott Fullman, chief strategist at Revere Securities Corp, after the earnings on Monday. “The company has been tracking very well given the volatility in the market, dominated by falling energy prices and weakness from China.”

The latest spurt in Alphabet’s stock price growth started around July last year. Since then the company has restructured, forming a new holding company and splitting into two parts.

Google includes its search engine, YouTube and related parts of the company, while a unit called ‘Other Bets’ includes its ‘moonshots’ such as self-driving cars, and encompasses Google Capital, the secretive X research division and Nest, which offers smart-home accessories.

Investors have appreciated the company’s new discipline on costs, which started with the arrival of new Chief Financial Officer Ruth Porat.

For a time it looked as if Apple would never relinquish the top spot in terms of market value. Bolstered by success of the iPhone, an enormous cash hoard, Apple took over the top U.S. spot in 2012 from Exxon Mobil, and at one point in early 2015 was worth more than $760 billion.

Alphabet shares are much more expensive, relatively speaking, than Apple’s, trading around 38 times earnings for the last 12 months, compared to about 11 times for Apple. Alphabet pays no dividend, whereas Apple’s dividend currently yields about 2 percent of the stock’s value annually.

Alphabet’s move into the top spot makes it the 12th company to be recognized as the largest publicly traded U.S. name since 1928, according to S&P Dow Jones Indices. Past No. 1 names include General Electric, General Motors and IBM.

Written by David Gaffen of Reuters

(Source: Reuters)

Bitcoin Spikes 70% in a Month; Nobody Knows Why

© Provided by CNBC

Bitcoin (BTC=), the world’s most popular digital currency, has been on a roll — but no one is really sure why.

After dipping well below $200 in January, bitcoin traded at more than $410 Tuesday afternoon before cutting some of those gains, according to the CoinDesk Bitcoin Price Index. That’s about 25 percent higher than the same time last year but well below the historical high of about $1,150.

This upswing, which began about a month ago when bitcoin traded below $240, comes on the heels of a steady stream of good news for the digital asset and its associated ecosystem. But even with recent favorable regulatory rulings, press coverage and business investments, experts in the space are struggling to explain the one-month jump of more than 70 percent.

For comparison, gold  (@GC.1) is down about 5 percent on the year, and slightly negative on the month.

Some have attributed the size of the recent jump to investors’ fear of missing out (FOMO), while others such as “Fast Money” trader Brian Kelly point to ecosystem headlines like the Winklevoss twins launching their exchangeand the Digital Currency Group announcing funding from Bain and MasterCard  (MA).

But bitcoin has boasted a steady parade of media highlights and major investments from important financial firms all year, so it’s not immediately obvious why this past month would mark a turning point.

Brendan O’Connor, the CEO of bitcoin trading firm Genesis Global Trading, told CNBC he has no easy answers about the price jump. Although he said rumors were flying around the community about international rings of traders teaming up to drive up the exchange rate, O’Connor was unable to confirm anything he’d heard.

For its part, Genesis Global is experiencing a “dramatic increase in activity” from renewed interest in bitcoin as a tradable asset, O’Connor said.

“When the price starts going up, people start coming out of the woodwork,” he said. “We’re setting new records almost on a daily basis for amount traded and number of transactions.”

It should be noted that bitcoin is a relatively illiquid market, so its exchange rate against major world currencies has been historically volatile. Still, O’Connor said volume from the Chinese bitcoin market has been “off the charts,” so there may be a genuine upswing in interest from that region.

In fact, Kelly suggested in a Tuesday note that Beijing’s tightening of capital controls may have spurred some of the recent price gains.

Additionally, many in the bitcoin community insist that the daily price of the cryptocurrency is not a relevant metric, as it distracts from the world-changing potential of the technology.

Others worry that the cycle of mainstream media coverage on bitcoin’s price will recreate a story they’ve seen before:

Written by Everett Rosenfeld of CNBC

(Source: CNBC)

Gold is Surely Headed to $25,000, but Maybe Not Until Next Century

© Jeffrey Coolidge/Getty Images
© Jeffrey Coolidge/Getty Images

CHAPEL HILL, N.C. (MarketWatch) — Gold most definitely is headed to $25,000 an ounce.

The question is when?

How about 103 years — not until 2118, in other words? Peculiar as that sounds, it actually rests on a strong historical foundation: You just need to assume that gold over the (very) long term will maintain its purchasing power against inflation (which it has over past centuries), and that inflation in the future will be 3% a year (its U.S. average over the past century).

Do you think inflation will be higher than 3% per year? Be my guest — see what you come up with. The table below shows, for each of several possible inflation rates, how many years it would take for gold to reach $25,000.

Notice that, assuming gold’s inflation-adjusted price stays constant, the only way gold makes it to $25,000 within 10 years — as some recently have forecasted — inflation would need to average 36% per year over the next decade. To put that in context, you should know that (based on the TIPS market) the 10-year break-even inflation rate currently is 1.84% annually.

To be sure, gold over the short- and intermediate-terms fluctuates wildly even in inflation-adjusted terms. So it’s entirely possible that gold could skyrocket in coming years even without double-digit inflation. But such wild fluctuations are a double-edged sword, since they can just as easily lead to a decline in gold’s inflation-adjusted price as an increase.

In fact, according to a National Bureau of Economic Research study published a couple of years ago, odds are good that gold’s fluctuations in coming years will take its price a lot lower than where it is today. The NBER study was by Duke University professor Campbell Harvey and Claude Erb, a former commodities portfolio manager at TCW Group.

They based their forecast on gold’s tendency to revert to whatever its fair value might be — eventually falling to that level whenever it trades much higher, and in due course rising to it when it is a lot lower. And even though no one can know with precision where gold’s fair value stands at any given time, their best estimate from the historical data is that it is equal to 3.46 times the Consumer Price Index’s level.

That currently translates to a gold price of $819 per ounce, or more than 30% lower than where it trades today.

Unfortunately, this NBER study doesn’t help us to know how long it will take for gold to get back to its fair value. But, if you assume that gold is subject to the same mean-reversion tendency as every other security and tradeable asset, then gold at some point in the future will trade at 3.46 times the CPI.

In other words, even if gold gets to $25,000 an ounce in our lifetime, or our kids’ lifetime, it is first likely to trade for a lot lower than where it stands now.

Written by Mark Hulbert of MarketWatch

(Source: MarketWatch)

These Simple Steps Could Prevent Another Financial Crisis

© Joshua Roberts/Bloomberg/Getty Images
© Joshua Roberts/Bloomberg/Getty Images

The International Monetary Fund, in its annual report on the U.S. economy, instructed the Federal Reserve to delay any interest rate hikes until next year, mainly because of fears of a slowing economy and the lack of need to tighten while inflation remains low. But there was another warning lurking inside that report, about potential financial instability.

“Assets in the nonbank sector have grown rapidly, and there are signs of stretched valuations across a range of U.S. asset markets,” the report concludes. Translated from IMF-ese, that means that money has migrated to unregulated spaces with unknown risks, with what could be bubble prices attached to them. If those risks manifest, and a fire sale ensues, regulators could be blindsided and large firms — particularly those in the insurance industry, the IMF cautions — could find themselves insolvent.

To remedy this, the IMF calls for better coordination between agencies, stronger data collection and increased regulation on insurance firms, non-bank financial services providers and money market funds. But it also calls for something quite novel, which the government should have done the moment it dug out of the financial crisis: what they term “simplifying the institutional structure.”

The truth is that, regardless of what you think of the Dodd-Frank reform law, the financial regulatory system we have is incredibly unintelligently designed. Overlapping responsibilities, an alphabet soup of agencies zealously guarding their jurisdictions and a lack of a clear hierarchy has created such a morass that major problems can easily fall through the gaps. Think of the worst organizational chart you can imagine — like the one for Initech, the fictional company from Office Space, where Peter Gibbons has eight different bosses — and make it a little worse, and that’s what our financial regulatory apparatus looks like. Nobody would start from scratch and design oversight this way.

Currently, regulatory agencies are segregated by business lines, even though we saw in the crisis that the differences between “insurance,” “banking,” “commodity trading” and any of several dozen other sectors are thin at best. Wall Street firms were able to shop for the most lenient regulator and even play them off one another to weaken oversight. Rulemaking is a mess, involving multiple agencies and often involving turf wars more than the public interest. Furthermore, it’s hard to oversee a new financial innovation that doesn’t precisely fit into any one category.

You see a hint of this in Elizabeth Warren’s broadside against Mary Jo White, chair of the Securities and Exchange Commission (SEC). Warren has many problems with White’s stewardship, but the biggest stem from the fact that White has a background as a litigator and not a regulator. The SEC both protects investors through enforcement of the securities laws and writes new rules and guidelines, so it’s impossible for anyone to have the proper profile to run a hybrid agency. That’s especially true when White’s husband works as a Wall Street lawyer, forcing her to recuse herself from over four dozen investigations. So the SEC gets an inexperienced regulator, and an absentee enforcer.

The good news is that this doesn’t happen to be terribly difficult to fix. We can unwind the different agencies that have built up over the years and simplify the regulatory system. We even have a blueprint, in the form of a little-known paper released in April by former Federal Reserve Chair Paul Volcker and his new organization, the bipartisan Volcker Alliance.

The paper coherently re-designs the system to fit with trends in modern finance, much like Roosevelt did with the original SEC and FDIC during the Depression. “The main focus of the Dodd-Frank Act was to strengthen and expand the scope of regulation, not to rationalize the regulatory framework,” the report notes.

This process of rationalization has some key features:

• The Financial Stability Oversight Council (FSOC) would get new independence as a super-regulator with broad oversight authority of the entire system. The Office of Financial Research would similarly get shifted out of the Treasury Department and have its own data collection mandate.

• A new Prudential Supervisory Agency (PSA) would be responsible for the supervisory authority now stretched across five different federal agencies, examining banks, systemically important financial institutions (SIFIs), investment dealers, money market funds and more.

• The Federal Reserve would do rulemaking, but the PSA could propose regulations for them to approve. It would also have some oversight authority in concert with the FSOC.

• The Federal Deposit Insurance Commission would focus on deposit insurance and orderly liquidation of failed firms and get out of the primary supervision business.

• The Office of the Comptroller of the Currency, which currently regulates nationally chartered banks, would be eliminated.

• The SEC and the Commodity Futures Trading Commission would be combined into one regulator with responsibility for investor protection and capital market conduct.

This not only streamlines the agencies to focus on their core strengths, but prevents overlaps that pull regulators away from actual monitoring and into conflict with one another. The monitors do the monitoring, the examiners to the examining, the rule-writers do the rule-writing and the investor protectors do the protecting. Everyone stays in their lane and knows their mission. Nobody has to worry about whether their supervisory role conflicts with their oversight role, or whether they should focus on rule-writing or enforcement. It’s a rare plan for governmental action that relies on common sense.

It’s worth noting that the one area of the system the Volcker Alliance chooses not to touch is the one that Dodd-Frank actually fixed: consumer protection. Dodd-Frank created the Consumer Financial Protection Bureau (CFPB) by pulling consumer protection authority out of a mélange of different agencies and into one coherent office. And that has worked almost exactly as planned, with a more focused and sharper agency recovering billions of dollars for consumers. It’s time to extend this to the rest of the regulatory perimeter.

Of course, imagining this structure is the easy part. Agency veterans will cling to their authority and resist efforts to take it away. But Dodd-Frank did manage to create CFPB and close down the unnecessary and weak Office of Thrift Supervision. There’s a blueprint for rebuilding the regulatory system the way you would if you were starting from scratch. Unfortunately, the risk-averse Obama administration shut down any talk of a full overhaul before getting started.

Just because the system makes internal sense doesn’t necessarily mean it will be effective. Regulatory backbone still matters. And the Volcker Alliance vision still grants perhaps too much power to the Federal Reserve, which does have competing mandates and a career staff that’s too willing to undermine regulatory goals. But at least with a well-defined apparatus, we could more easily spot the shrinking violets and the sellouts, rather than chalking up regulatory failures to a broken system.

Democrats and Republicans on the Senate Banking Committee are offering competing financial reform bills, but they merely tweak the system, raising the asset threshold for SIFIs, relieving some reporting requirements for community banks and increasing scrutiny on the Federal Reserve. These bills again layer onto an absurd system that was ineffective in stopping the 2008 crisis. It’s not just that we need more straightforward rules, but a better system to carry them out.

Written by David Dayen of The Fiscal Times

(Source: The Fiscal Times)