Setting the Stage for the Coming Recession

Brian Smedley, head of the Macroeconomic and Investment Research Group at Guggenheim Investments, explains what the data tell us about the timing and severity of the coming recession.

Key Takeaways:

• Fed rate cuts could start to have more impact, but so far data are consistent with our recession forecast, which also suggests the next recession will be of average severity.
• Limited monetary and fiscal policy space may prolong the recession; the Fed doesn’t have much room to maneuver on rates, and the effect of 2018’s one-time tax cuts has worn off.
• When the business cycle turns, the Fed is likely to pull out all the stops by cutting rates to the zero bound and recommencing asset purchases.
• Historical evidence of “successful” Fed cuts is mixed, however, and it is difficult to correctly time policy moves.
• At this point in the cycle, we believe there is more risk to the downside than upside and caution investors to focus on capital preservation.

Source: Guggenheim Investments 

Market Update: July 3, 2017

Last Week’s Market Activity

• Stocks end first half with down week. Nasdaq lost ~2% on tech weakness, Dow -0.2%, S&P 500 Index -0.6%; Russell 2000 ended flat. Market weakness partly attributed to hawkish global central bank comments, which pushed yield on 10-year Treasuries up 15 basis points (0.15% to 2.30%), pressured the dollar. Favorable bank stress test results boosted financials, renewed focus on reflation trade into banks, energy.
• Oil bounce continued, WTI crude oil +7%, bringing session winning streak to seven and price back above $46/bbl. Friday brought first weekly drop in rig count since January.
• Strong first half despite recent choppiness. Nasdaq rallied 14%, its best first half since 2009, S&P 500 (+8%) produced its best first half since 2013 (Dow matched S&P’s first half gain).

Overnight & This Morning

• S&P 500 higher by ~0.3%, following gains in Europe. Quiet session likely with early holiday close (1 p.m. ET).
• Solid gains in Europe overnight– Euro Stoxx 50 +0.9%, German DAX 0.6%, France CAC 40 +1.0%. Solid purchasing managers’ survey data (June Markit PMI 57.4).
• Asian markets closed mostly higher, but with minimal gains.
• Crude oil up 0.4%, poised for eighth straight gain.
• Treasuries little changed. 10-year yield at 2.29%. Early bond market close at 2 p.m. ET.
• Japanese Tankan survey of business conditions suggested Japanese economy may have increased in the second quarter, manufacturing activity is at multi-year highs.
• China’s Caixin manufacturing PMI, generally considered more reliable than official Chinese PMI, exceeded expectations with a 50.4 reading in June, up from 49.6 in May.
• Today’s economic calendar includes key ISM manufacturing index, construction spending.

Key Insights

• Several key data points this week, despite the holiday-shortened week. Today brings the important Institute for Supply Management (ISM) Purchasing Managers’ Index (PMI), followed by minutes from the June 13-14 Federal Reserve (Fed) policy meeting on Wednesday and Friday’s employment report. Key overseas data includes services PMI surveys in Europe, China’s manufacturing PMI, and the Japanese Tankan sentiment survey (see below). Market participants will scrutinize this week’s data for clues as to the path of the Fed’s rate hike and balance sheet normalization timetables. Views are diverging again, though not as dramatically as in late 2015/early 2016.

Macro Notes

• The first six months in the books. It was a solid start to the year, with the S&P 500 up 8.2%, the best start to a year since 2013. Yet, this year is going down in history as one of the least volatile starts to a year ever. For instance, the largest pullback has been only 2.8%–which is the second smallest first-half of the year pullback ever. Also, only four days have closed up or down 1% or more–the last time that happened was in 1972. Today, we will take a closer look at the first half of the year and what it could mean for the second half of the year.

Monday

• Markit Mfg. PMI (Jun)
• ISM Mfg. (Jun)
• Construction Spending (May)
• Italy: Markit Italy Mfg. PMI (Jun)
• France: Markit France Mfg. PMI (Jun)
• Germany: Markit Germany Mfg. PMI (Jun)
• Eurozone: Markit Eurozone Mfg. PMI (Jun)
• UK: Markit UK Mfg. PMI (Jun)
• Eurozone: Unemployment Rate (May)
• Russia: GDP (Q1)
• Japan: Vehicle Sales (Jun)

Tuesday

• Happy July 4^th Holiday!
• Japan: Nikkei Japan Services PMI (Jun)
• China: Caixin China Services PMI (Jun)

Wednesday

• Factory Orders (May)
• Durable Goods Orders (May)
• Capital Goods Shipments and Orders (May)
• FOMC Meeting Minutes for Jun 14
• Italy: Markit Italy Services PMI (Jun)
• France: Markit France Services PMI (Jun)
• Germany: Markit Germany Services PMI (Jun)
• Eurozone: Markit Eurozone Services PMI (Jun)
• UK: Markit UK Services PMI (Jun)
• Eurozone: Retail Sales (May)

Thursday

• ADP Employment (Jun)
• Initial Jobless Claims (Jul 1)
• Trade Balance (May)
• Germany: Factory Orders (May)
• ECB: Account of the Monetary Policy Meeting
• Mexico: Central Bank Monetary Policy Minutes
• Japan: Labor Cash Earnings (May)

Friday

• Change in Nonfarm, Private & Mfg. Payrolls (Jun)
• Unemployment Rate (Jun)
• Average Hourly Earnings (Jun)
• Average Weekly Hours (Jun)
• Labor Force Participation & Underemployment Rates(Jun)
• Germany: Industrial Production (May)
• France: Industrial Production (May)
• Italy: Retail Sales (May)
• UK: Industrial Production (May)
• UK: Trade Balance (May)

 

 

 

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

Market Update: June 26, 2017

Last Week’s Market Activity

• After closing once again at record levels last Monday, the Dow and the S&P 500 Index battled a wave of sector rotation for the balance of the week, finishing higher by the slightest of margins.
• It was the 2nd consecutive weekly gain for the S&P 500, as increases in healthcare (+3.7%) and technology (+2.3%) offset weakness in the energy (-2.9%), financials (-1.8%), and utilities (-1.8%) sectors.  Positive news on drug development and potential changes to the Affordable Care Act drove healthcare higher, while continued weakness in WTI crude oil ($43.00; -4.0% for the week) pressured the energy sector.
• The yield on the 10-year Treasury fell to 2.14%, its second lowest close of 2017, pressuring the U.S. dollar, which edged down -0.2% on Friday.

Overnight & This Morning

• Asian stocks rose for a third day, led by technology companies.  The MSCI Asia Pacific Index rose +2.0% and equity markets in China and Hong Kong had gains approaching 1.0%. In Japan, The Nikkei managed to climb despite a report from the Bank of International Settlements warning of dollar denominated risk on bank balance sheets.
• European stocks rebounded from three weeks of losses. German business confidence hit a record in June, but Italy had to bail out two banks totaling $19 billion.
• Commodities – WTI crude oil rose, trimming its biggest monthly decline in one year. Gold extended its decline to the lowest level in almost six weeks.
• U.S. stock futures are up slightly as the dollar climbed and Treasury yields jumped after several Federal Reserve officials suggested further rate increases.

Key Insights

• Mixed signals. The financial markets are sending mixed signals, trading within a tight range in an extended expansion. The debate now centers on if the U.S. economy can continue to exhibit growth in output and profits (signal from stocks) or it may slip into a recession (signal from Treasuries). Our view is that though the growth rate in manufacturing may have peaked, we expect Purchasing Manager Indexes (PMI) to remain in expansion territory. While auto sales may be down ~5.0% from last year, the rise in household formation suggests pent up demand remains in the housing market. Finally, with solid employment levels and improving wages, consumption is well-positioned to support growth and any clarity on regulation, infrastructure, and tax plans could provide an additional boost.
• Brexit. Friday marked the 1st anniversary of the controversial Brexit vote, which called for the U.K. to leave the European Union (EU).  To mark the occasion, the pound sterling rose +0.2% to $1.27, paring its weekly decline, and the FTSE 100 Index fell -0.2% on Friday. While the U.K. is the largest importer of the EU countries, the FTSE 100 is largely comprised of exporters, with 2/3rds of its revenue generated overseas.  This helps explain why the approximately 15.0% drop in the pound sterling was accompanied by a rise of a similar magnitude (+17.0%) in the FTSE 100 over the past year.

Macro Notes

• Technicals continue to look strong. One of the strongest aspects of this equity bull market has been that the technicals have and continue to support higher prices. This week we take a closer look at the global bull market and why broad participation suggests it still has legs.
• 41 weeks and counting. The S&P 500 has now gone 41 straight weeks without closing lower by 2% or more, but that’s not even the most surprising point.

Monday

• Durable Goods Orders (May)
• Chicago Fed National Activity Report (May)
• Cap Goods Shipments and Orders (May)
• Dallas Fed Mfg. Report (Jun)
• ECB: Draghi
• BOE: Carney
• BOJ: Kuroda

Tuesday

• Conference Board Consumer Confidence (Jun)
• Richmond Fed Mfg. Report (Jun)
• Italy: Mfg. & Consumer Confidence

Wednesday

• Advance Report on Goods Trade Balance (May)
• Wholesale Inventories (May)
• Pending Home Sales (May)
• France: Consumer Confidence (Jun)
• Eurozone: Money Supply (May)
• Itally: PPI & CPI (Jun)
• Bank of Canada: Poloz
• Japan: Retail Sales (May)

Thursday

• GDP (Q1)
• Germany: CPI (Jun)
• Eurozone: Consumer Confidence (Jun)
• BOJ: Harada
• Japan: National CPI (May)
• Japan: Industrial Production (May)
• China: Mfg. & Non-Mfg. PMI (Jun)

Friday

• Personal Income (May)
• Consumer Spending (May)
• Chicago PMI (May)
• Core Inflation (May)
• UK: GDP (Q1)
• France: CPI (Jun)
• Germany: Unemployment Change (Jun)
• Eurozone: CPI (Jun)
• Canada: GDP (Apr)
• Japan: Vehicle Production (May)
• Japan: Housing Starts (May)
• Japan: Construction Orders (May)

 

 

 

 

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

Market Update: June 12, 2017

Last Week’s Market Activity

• Nasdaq tumbled 1.8% Friday, its biggest one-day drop since June 2016. Tech weakness, attributed to crowded investor positioning, outsized 2017 gains, and cautious sell side commentary, powered substantial value outperformance relative to growth. Dow, Russell 2000 gained (0.4%), while S&P 500 ended flat.
• Energy (+2.5%) led Friday’s market action, followed by financials (+1.9%);both benefited from tech outflows.
• Treasuries fell modestly, helping banks (10-year Treasury yield ended at 2.20%).
• Dollar and WTI crude oil up, COMEX gold down.Dollar rise dragged gold down 0.6% to >$1270. Oil gained 0.4% to ~$46/bbl, boosting the energy sector attempted recovery from inventory-driven losses earlier in the week. Copper rose for the third straight session.
• Muted reaction to U.K. election as pound sold off (which eroded U.K. returns for U.S. investors) but U.K. stocks in local currency generally shrugged off surprise election result.
• Mixed week. Friday’s rotation was evident in weekly performance with Dow (+0.3%), Russell 2000 (+1.2%) faring well, S&P 500 down slightly (-0.3%), Nasdaq down sharply (-1.6%). Despite the week’s big political stories, broadest equity market averages didn’t move much.

Overnight & This Morning

• S&P 500 down as Friday’s technology sell-off carries over into morning trading.
• Technology weakness weighed on Asian markets:Nikkei slipped 0.5%, Shanghai Composite lost 0.6%, Hang Sang fell 1.24%. Spillover into Europe as well. Core European markets down nearly 1% in midday trading.
• Treasuries unchanged, dollar is lower vs. euro and yen; Gold is little changed.
• Oil rebound (+1.6%) follows Friday’s gains as the commodity struggles to maintain support in the mid $40s.
• More European election results. French President Macron’s party set for a big parliamentary majority following Sunday’s first-round vote. Regional Italian elections saw anti-euro 5-Star Movement underperform. In the U.K. we’re watching the formation of political alliances to determine potential Brexit/trade impact.
• Trump administration’s focus this week to be on apprenticeships, jobs following last week’s infrastructure push.
• Financial regulation also making headlines as Dodd-Frank revamp accelerates and parts of the DOL’s Fiduciary Rule go into effect. Look for easing of regulatory burden on smaller financial institutions, positive for regional banks.

Key Insights

• Reflation rotation? Friday’s sharp moves (technology down and financials, energy and small caps up) appeared to be rotation from areas that have been working to those that haven’t given the broad averages did not move much. Technology was a source of funds for energy, financials, and small cap purchases, areas that tend to benefit from stronger economic growth, higher interest rates and inflation. We still favor the technology sector and, for those currently underweight the sector, we would view further weakness as a potential opportunity to add exposure.
• We expect a rate hike on Wednesday and will be watching closely for clues about the Federal Reserve’s (Fed) rate path for the rest of 2017. Market participants will scrutinize the Fed statement and press conference for any changes to economic growth or inflation outlooks, and any additional details regarding balance sheet normalization. We remain on the fence about whether we get another hike in 2017 after the presumed move this week but, regardless, we see modest additional return potential for both stocks and bonds over the balance of the year.
• Market warning to Fed? The fact that markets are pricing in a flatter trajectory of rate hikes moving forward, and that even relatively short-term two-year Treasury yields are flat compared to levels seen in the aftermath of the Fed’s March meeting, may be the market’s way of warning the Fed that, with inflation expectations broadly contained, being too aggressive with rate hikes in the near term may harm growth.

Macro Notes

• Big drop for tech. Technology dragged the Nasdaq down 1.8% for its third worst day of the year and its worst week year to date (-1.5%). What made this big drop unique was it came the day after setting a new all-time high. Other than a 2.6% drop in May, you have to go back to March 2000 the last time there was a larger drop from an all-time high for the Nasdaq.
• When does the June swoon happen? We noted at the start of the month that June has historically been a weak month for equities and over the past 10 years only January has been worse for the S&P 500 Index. Taking a closer look at the monthly performance though shows it is usually the second half of June that tends to see most of the weakness. With the Fed and Bank of Japan on tap for meetings this week, could it be time for some volatility?

Monday

• Monthly Budget Statement (May)
• Japan: Machine Orders (Apr)

Tuesday

• PPI (May)
• UK: CPI & PPI (May)
• UK: Retail Price Index (May)
• Germany: ZEW Survey (June)
• China: Industrial Production

Wednesday

• CPI (May)
• Retail Sales (May)
• FOMC Rate Decision (June 14)
• Yellen Press Conference
• Germany: CPI (May)
• Eurozone: Industrial Production (Apr)
• UK: Jobless Claims (May)
• UK: Unemployment Rate (Apr)
• New Zealand: GDP (Q1)
• Japan: Industrial Production and Capacity Utilization (Apr)

Thursday

• Empire State Mfg. Report (June)
• Philadelphia Fed Mfg. Report (June)
• Industrial Production and Capacity Utilization (May)
• US Treasury International and Capacity Utilization (May)
• US Foreign Net Transactions (Apr)
• BOJ: Policy Balance Rate and 10-Yr Yield Target
• Bank of England: Bank Rate Decision

Friday

• Housing Starts (May)
• Building Permits (May)
• Eurozone: New Car Registration (May)
• Eurozone: CPI (May)
• Russia: GDP (Q1)
• Bank of Russia: Key Rate Decision
• China: New Loan Growth and Money Supply (May)

 

 

 

 

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

 

Market Update: June 5, 2017

Last Week’s Market Activity

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

Overnight & This Morning

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

Key Insights

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

Macro Notes

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

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

Monday

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

Tuesday

• Eurozone: Markit Eurozone Services PMI (May)

Wednesday

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

Thursday

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

Friday

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

 

 

 

 

 

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

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.

Monday

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

Tuesday

• 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)

Wednesday

• 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)

Thursday

• 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)

Friday

• 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.

Market Update: May 22, 2017

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.

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.

• 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?

• 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: May 15, 2017

• Overnight in Asia most indexes were up fractionally while Japan pulled back slightly. G-7 discussions focused on protectionist threats, which weighed on sentiment. North Korea also fired a new missile over the weekend, adding to tensions on the peninsula.
• WTI crude oil prices are up ~3.0%, to $49.25/barrel, after energy ministers from Saudi Arabia and Russia agreed that extension to oil production cuts for an additional nine months, through March 2018, is needed.
• European markets were mixed on either side of flat. Investors were positive on Christian Democrats state victory supporting Merkel’s hold on power, while oil move was also welcomed.
• U.S. markets are moving higher, boosted by news on potential oil production cuts. Meanwhile, concerns over cyberattacks and Trump/Comey drama may dampen enthusiasm as trading progresses.

Key Insights

• The economy remains on track for Q2 gross domestic product (GDP) growth of 2.0% to 2.5% despite mixed inflation readings and retail sales below forecast.
• The Consumer Price Index (CPI) rose +0.2% month over month and up from the drop of -0.3% in March, however both year over year CPI (+2.2%) and year over year core CPI (+1.9%) were below expectations, triggering the rally in safe havens last Friday.
• Retail sales (+0.4%) were also below expectations, but up from the prior month. When considering the improvement in consumer sentiment, it is important to remember that this data point (retail sales) and the performance of retail stocks, should not be viewed as an indictment of the U.S. consumer. Rather than a changing consumer, it is a change in consumer buying habits, which is combining to alter not only retail sales figures, but also pricing measures. Consumers are spending: 1) more online, 2) on experiences over goods, and 3) comparison shopping using mobile technology. Consequently, it is very difficult for the department store model to continue charging premium, retail prices.
• Considering the unemployment rate of 4.4%, wage growth of +2.5% year over year, riding confidence and delayed tax refunds, the near-term (Q2) and longer-term (2017) GDP trajectory appears favorable. Clarity on tax reform could take these numbers even higher.

Macro Notes

• Excellent earnings season but bar will soon be raised. First quarter earnings season has been excellent by almost any measure. Results beat expectations by more than usual, the overall growth rate is very strong, and guidance has provided above-average support for analysts’ estimates for the balance of 2017. But at the risk of raining on the earnings parade, we would note that comparisons will get tougher as we anniversary the earnings recession trough of 2016, while the risk that the corporate tax reform timetable gets pushed into 2018 has increased. Market participants generally expect fiscal policy to begin to provide an earnings boost by year end, an expectation that has become increasingly tenuous.

 

• Chinese industrial production growth weaker than expected. Chinese industrial production growth came in at 6.5% vs. expectations of 7% and down from period month of 7.6%. On an absolute basis, the economy is still on track to meet its growth goals, though it looks like growth may have peaked for the year at the end of the first quarter. The government continues to crack down on excess leverage in the financial system; today’s numbers are unlikely to move them off that path.
• Japan domestic demand, and prices, rise in April. We normally think of Japan as an export oriented economy, but domestic demand increased over 4% on a year-over-year basis, with the impact felt most strongly in demand for raw materials. Producer prices rose modestly last month against declining expectations and are running at 2.1% annually.
• Bank of Japan. Just like the Federal Reserve (Fed) and the European Central Bank (ECB), the Bank of Japan (BOJ) is under some public pressure to outline how it intends to unwind both its zero-interest rate policy and the massive expansion of its balance sheet to 93% of the country’s GDP. Recent statements from BOJ Governor Kuroda suggests such policy announcements may be coming. The more good news that comes out of the Japanese economy, the more pressure the BOJ is under.
• Win streak snapped, but lack of volatility remains. The S&P 500 snapped its 3-week win streak last week, with a modest 0.3% drop. One thing continued though and that was the incredibly small daily ranges and lack of overall volatility. On the week, the S&P 500 traded in less than a one-percent range (from high to low) for the second consecutive week ( only the third time since 1995). Additionally, the intraday range on Friday was 0.22% – the smallest daily range on a full day of trading in nearly three years.
• Checking in on small caps. The lack of volatility isn’t just in the blue chips, as the Russell 2000 has traded in a range of only 6.8% over the past 20 weeks. That is the tightest 20-week range since at least 1990. After a big jump in the fourth-quarter, small caps have lagged large caps this year, as they continue to consolidate the late 2016 gains.

Tuesday

• Italy: GDP (Q1)
• UK: CPI & PPI (Apr)
• Eurozone: GDP (Q1)

Wednesday

• Russia: GDP (Q1)
• Japan: GDP (Q1)

Thursday

• LEI (Apr)
• ECB: Draghi

 

 

 

 

 

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: May 1, 2017

• Stocks head higher to begin week. U.S. stocks are modestly higher in early trading, following news that Congress reached an agreement late Sunday to fund the government through September 30; pending approval by Friday, the deal will avoid a government shutdown. The major averages all closed lower on Friday, though the S&P 500 still managed a 1.5% gain for the week. Earnings dominated last week’s headlines, as the S&P’s advance was led by more than 2% weekly gains in the technology, healthcare and consumer discretionary sectors. Overnight, nearly all major markets in Asia and Europe were closed for holidays; Japan’s Nikkei was the exception, closing up 0.6% after Purchasing Mangers’ Index (PMI) data came in near expectations. Meanwhile, the yield on the 10-year Treasury is up slightly to 2.30%, COMEX gold ($12669/oz.) is flat, and WTI crude oil is dropping more than 1% to below $49/barrel.

• Another busy week of earnings on tap. A very strong earnings season continues this week with 127 more S&P 500 companies slated to report results. With about two-thirds of companies having reported, S&P 500 earnings for the first quarter of 2017 are now tracking to a 13.6% year-over-year increase, well above the 10.2% increase reflected in consensus estimates as of April 1. The upside surprise has been about more than just easy comparisons in energy, with broad-based strength across several key sectors, including financials, healthcare, industrials, and technology. The 77% earnings beat rate thus far, should it hold, would be the best since 2010.

• Company guidance has been more upbeat than usual. Forward estimates for the S&P 500 have only fallen 0.2% since earnings season begin, reflecting generally optimistic guidance from corporate America (average earnings season declines are 2-3%). We see little potential for policy upside in calendar 2017 (though there is a fair amount in 2018), suggesting most of the resilience in earnings estimates reflects recent firming in the business environment.
• Employment report highlights a busy week. The first week of the month always includes some key economic data, highlighted by Friday’s Employment Situation report. Usually, any Federal Reserve (Fed) policy meeting would be the week’s highlight, but this week’s meeting, concluding Wednesday, will not receive as much attention, with expectations near zero for a rate hike and no new projections accompanying the release of the policy statement. We’ll also get a read on U.S. business activity, with April manufacturing and non-manufacturing PMI from the Institute for Supply Management released on Monday and Wednesday, respectively. Internationally, we’ll get March Eurozone unemployment on Tuesday, Eurozone first quarter 2017 gross domestic product (GDP) on Wednesday, and preliminary Eurozone PMI data on Thursday.
• Congress reaches deal to fund the government. As expected, after an initial one-week extension, House and Senate negotiators reached a deal to fund the government through September. A vote is expected later this week, possibly as early as Wednesday. Although few saw material risk of a shutdown, clearing this hurdle does help pave the way for other initiatives. Tax reform is the top priority but Republican policymakers continue to try to craft an agreement to repeal and replace ObamaCare, where the path to compromise remains extremely difficult.
• Almost all markets in Europe and Asia are closed today for the May 1 holiday. Japan is the major exception to the general state. One data point was released, Chinese manufacturing PMI was 51.2, lower than the March figure of 51.8 and also lower than expectations. Lower prices for commodities is largely the culprit, not a drop in demand. Still, it does highlight the sensitivity of the Chinese economy to “Old Industrial China.” After generally good economic reports in Q1 2017, the Chinese government has announced a series of crackdowns on excessive leverage in the real estate and financial markets.
• Reflecting on Nasdaq 6000. The Nasdaq Composite hit 6000 last week, more than 17 years (or 6250-plus days) after first reaching 5000 back in March of 2000. During the dotcom boom in the late 1990s, moves from 3000 to 4000 and 4000 to 5000 were quick at 56 and 71 days, before the long and winding road to 6000 over the course of nearly two decades. Although this milestone has sparked more bubble talk in the media, we believe stocks are far from bubble territory, and the Nasdaq stands on a much stronger foundation today than it did in the days leading up to the dotcom crash.
• Welcome to May. May is a busy month with multiple events that could move global markets. From the Fed meeting, to Presidential election in France, to the kickoff of what has historically been the worst six months of the year for equities; this is a big month.

Monday

• Personal Consumption Expediture Core & Deflator (Mar)
• ISM Mfg. PMI (Apr)
• BOJ: Minutes of March 15-16 Meeting
• China: Caixin Mfg. PMI (Apr)

Tuesday

• Eurozone: Unemployment Rate (Mar)

Wednesday

• ISM Non-Mfg. PMI (Apr)
• FOMC Rate Decision (May 3)
• Eurozone: GDP (Q1)

Thursday

• Eurozone: Markit PMI (Apr)
• Eurozone: Retail Sales (Mar)

Friday

• Change in Nonfarm, Private & Mfg. Payrolls (Apr)
• Unemployment Rate (Apr)
• Labor Force Participation & Underemployment Rates (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 24, 2017

• 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%.

• 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.

• 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.

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.