Is Europe Finally On The Mend?

Europe has been in the news this week, with Italy voting down the country’s constitutional referendum on Sunday, December 4, and the European Central Bank (ECB) announcing yesterday a surprise tapering by extending its quantitative easing (QE) policy from March 2017 until at least December 2017, while unexpectedly reducing the amount of the monthly bond purchases.

News is one thing; it is how the markets react to the news that matters more, and the technical picture is surprisingly looking a lot better in Europe lately. As Ryan Detrick, Senior Market Strategist, put it, “European markets have trailed the U.S. over the past decade, as a slowing economy, debt crises, and aging populations have hurt equity performance, but we are now seeing some technical signs things could finally be improving across the pond.”

From a longer-term perspective, the EURO STOXX 50 (a basket of European blue chip equities) has traded lower for the past 16 years and, as you can see below, continues to have trouble with this long-term bearish trend line. Until it can clearly break above this trend line, an aggressive bullish stance on European equities is risky.

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Now for the good news; we are seeing some signs of life for Europe from a technical viewpoint. The EURO STOXX 50 spiked higher after the Italian vote and is now above a two-year bearish trend line.

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The German DAX, the largest and most influential stock market in Europe, has broken out to its highest level in a year. The French CAC 40 and Austrian ATX Index are both breaking out to new 2016 highs as well. Meanwhile, the big laggard in Europe all year has been Italy. Even after the “no” vote over the weekend, the FTSE MIB is back to flat on the year and at its highest level since early May. In fact, for the week (as of Thursday, December 8’s close) it was up 7.8%, which would be the best weekly gain in more than five years.

This doesn’t mean European stocks will finally start to outperform U.S. stocks, but it is a major step in the right direction.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

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.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Quantitative Easing (QE) refers to the Federal Reserve’s (Fed) current and/or past programs whereby the Fed purchases a set amount of Treasury and/or Mortgage-Backed securities each month from banks. This inserts more money in the economy (known as easing), which is intended to encourage economic growth.

The EURO STOXX 50 Index is a blue-chip index for the Eurozone, which covers 50 stocks from 12 Eurozone countries: Austria, Belgium, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Portugal, and Spain.

The CAC 40 is a capitalization-weighted index of the 40 largest French equities designed to measure the overall performance of the Paris Bourse, the French stock exchange.

The Deutscher Aktien Index (DAX) is a stock index that represents 30 of the largest and most liquid German companies that trade on the Frankfurt Exchange.

The Austrian Traded Index (ATX) is a stock index that represents 20 Austrian stocks; it is the leading index of the Vienna Stock Exchange.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

 

Tracking # 1-562717 (Exp. 12/17)

Market Update: Friday, December 9, 2016

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  • Stock rally rolls on. (10:27am ET) Global equities are continuing to move higher this morning as domestic indexes hover near yesterday’s record-setting levels, which came amid another day of widespread sector gains led by financials; industrials, consumer staples, and telecom weighed on the S&P 500 (0.2%), but not enough to pull it into negative territory. In overnight trading, an acceleration in Chinese inflation was met with mixed reactions, pushing the Shanghai Composite up half a percent, while the Hang Seng fell nearly as much. The data, coupled with yen weakness, helped the Nikkei (1.2%) hit 12-month highs. European markets are poised for their best weekly gain since February, led by bank stocks on the heels of a steepening yield curve. Elsewhere, WTI crude oil ($51.42/barrel) is moving higher after a recent bout of weakness, COMEX gold ($1162/oz.) is lower, and Treasury yields are near flat at 2.41%.

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  • FOMC and much, much more. The Federal Reserve Bank’s (Fed) Federal Open Market Committee (FOMC) will hold its eighth and final meeting of 2016 next Wednesday, and it will likely raise rates by 25 basis points (0.25%), a move that is fully priced in by the fed funds futures market. In addition, the FOMC will release a new set of dot plots and economic forecasts for 2017 and beyond. But that’s not all. Next week is chock full of key economic data for November and December, including reports on housing, inflation, consumer spending, and manufacturing. Overseas, the key ZEW report in Germany and the Tankan survey in Japan are due out, and China will continue releasing its data set for November. The Bank of England meets next week as well and is expected to stand pat. Mexico’s central bank is likely to raise rates, as inflation is heating up south of the border.
  • Sneaky one-week winner. Despite the 10-year yield near multi-year highs, the interest rate sensitive real estate sector has staged an under-the-radar rebound over the past week as markets continue to focus on the so-called Trump trades, i.e., financials, industrials, energy, and small caps. The S&P 500 real estate sector returned 5.0% over the past week, topping all other S&P sectors, after underperforming the broad S&P 500 by more than 600 basis points (6.0%) from the election through December 1. We like the sector (and master limited partnerships) for yield-oriented investors, given our expectation that interest rates stabilize in the recent range at or below 2.50%, with upside risk in 2017 of only about 25 basis points. In general, we do not see evidence of overbuilding that would potentially bring the real estate cycle to an end, valuations appear reasonable, and we expect continued, steady cash flow growth from the sector overall, consistent with a favorable supply-demand picture across most segments and rising inflation.
  • Europe shines this week. It has been a big week for European equity markets, as the EURO STOXX 50 was up 5.6% for the week as of last night, for the best weekly gain since October 2015. Breaking it down some, Italy has been the big laggard in Europe this year. However, even after the “no” vote for the Italian referendum, the Italian FTSE MIB was still up 7.8% for the week–the best week in more than five years. The German DAX and Paris CAC 40 have both broken out to new 2016 highs as well. Today on the LPL Research blog, we will take a closer look at European markets and how much they have improved.
  • The win streak continues. The S&P 500 is up five consecutive days; it hasn’t been up six in a row since June 2014. In fact, the past five times it was up five days in a row, it was down on the sixth day. The longest win streak since 2009 has been eight in a row twice in 2013, and the all-time record win streak is 14 in a row from March and April 1971.
  • Volatility gains again. Remember Wednesday was a very rare day, as the S&P 500 gained 1.3%, yet the Volatility Index (VIX) gained more than 3%. The last time that happened while the S&P also made a new 52-week high was March 2000 (right before the bear market). Of course, the last time it happened on any day (not just a new high) was in July 2009 (early on in this nearly eight year old bull market). So there’s something to cheer for bulls and bears alike. Well, yesterday the S&P 500 closed in the green again as did the VIX–so both have been green two consecutive days. The last time that happened was February 2012, and March 2006 before that. Incredibly, this has never happened three straight days. In other words, rising volatility and rising equity prices are very rare.

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Friday

Consumer Sentiment and Inflation Expectations (Dec)

Click Here for our detailed Weekly Economic Calendar

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.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking #1-561982

What Does Heightened Bond Volatility Tell Us?

Volatility within stock and bond markets is one of the metrics we track in order to understand market sentiment. While volatility in equity markets has declined from elevated levels seen before the U.S. presidential election, bond market volatility has remained at pre-election heightened levels. This can be seen in the divergence between the level of the Volatility Index (VIX), which is a measure of market expectations of near-term equity volatility conveyed by S&P 500 stock index option prices and the Merrill Lynch Option Volatility Estimate (MOVE) Index, which is a measure of market expectations of near-term fixed income volatility conveyed by Treasury option prices. This divergence indicates that bond markets expect short-term volatility while equity markets do not.

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Volatility is important to look at in context. Bond market volatility has been lower than average since the 2007-08 financial crisis, as central bank intervention has muted yields and dampened the effects of other market forces. The MOVE index has averaged 97 over its entire history (6/30/98–12/6/16), but it has averaged approximately 71 over the last five years. So while the reading of 86.6 on December 1, 2016 was on the high side relative to the last five years, it is still low relative to history.

Given the significant changes in the bond market following the financial crisis, looking at the last five years in isolation may lead to more relevant analysis. We do see differences in future return patterns based on whether or not the MOVE is at an elevated level. Over those five years, the MOVE has been above 80 approximately 25% of the time. Subsequently, one-year total returns have historically been higher following those periods of heightened volatility, relative to lower volatility periods.

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Despite the encouraging one-year forward return analysis, our base case for the broad bond market, as represented by the Barclays Aggregate index, is for muted, low single-digit returns in 2017. Only time will tell if fixed income volatility will remain elevated, as many investors brace themselves for a potential continuation of the volatility that began in November 2016.

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

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.

The economic forecasts set forth in the presentation may not develop as predicted.

Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

The S&P 500 Index is a capitalization-weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

Bonds are subject to market and interest rate risk if sold prior to maturity. Bond values and yields will decline as interest rates rise, and bonds are subject to availability and change in price.

The Barclays U.S. Aggregate Bond Index is a broad-based flagship benchmark that measures the investment-grade, U.S. dollar-denominated, fixed-rate taxable bond market. The index includes Treasuries, government-related and corporate securities, MBS (agency fixed-rate and hybrid ARM pass-throughs), ABS, and CMBS (agency and non-agency).

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-562376 (Exp. 12/17)