How Much Longer Will the Expansion Last?

The latest economic expansion, which began June 2009, celebrated its eighth birthday this month. It also hit another milestone in recent months, when it became the third longest expansion since World War II, exceeding the length of the 92-month expansion that started in November 1982. So, what does this mean for the expansion moving forward?

As we have indicated in the past, we don’t believe that expansions die of old age. Rather, they die of excesses. As noted in our Midyear Outlook 2017: A Shift in Market Control publication, the economy has experienced a slow and steady trajectory throughout the expansion, and this slower pace may actually lessen the potential for economic excesses; a theory that is corroborated by readings for levels of spending, confidence, and borrowing as measured by the LPL Research Over Index.

Despite a weak first quarter where gross domestic product (GDP) growth came in at a disappointing 1.2%, we continue to look for the U.S. economy to expand near 2.5% in 2017 with potential for further acceleration in 2018. Although potential delays in passing major fiscal policies introduce some risk to the downside, our optimism stems from:

  • Recent data on consumption, employment, housing, manufacturing, and services all pointing toward potential improvement in the months and quarters ahead.
  • Continued job growth and moderate wage gains that may allow for consumption growth without the need for an accommodative central bank.
  • Anticipated fiscal legislation that may provide further incentives for businesses to take economic risks, such as investing in property, plant, and equipment, to position for future growth.

Potential risks to our outlook include:

  • “Soft data,” such as consumer and business confidence measures, need to translate into stronger “hard data” (actual measures of economic activity).
  • Continued strength in business spending will be needed to drive productivity growth, which is key to sustainable long-term economic growth.

Fiscal policy could also enable government spending to help drive GDP, while the Federal Reserve’s tightening of monetary policy may limit upward pressure on the U.S. dollar, mitigating the potential for currency gains to interfere with export growth (a stronger U.S. dollar makes domestic goods more expensive for foreign buyers). Also, global GDP growth has been trending positive in 2017, and further improvements could benefit the U.S. economy by boosting exports.

Fiscal and monetary policy, coupled with recent economic trends, suggest our beginning-of-year forecast for near 2.5% GDP growth in 2017 remains reasonable.

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.

Gross Domestic Product (GDP) is the monetary value of all the finished goods and services produced within a country’s borders in a specific time period, though GDP is usually calculated on an annual basis. It includes all of private and public consumption, government outlays, investments and exports less imports that occur within a defined territory.

To complete the Over Index, LPL Research measures trends in three broad economic drivers: spending, borrowing, and confidence. For each of these three drivers, we found four diverse components that reflect the economic activity of that sub-index from a different angle. The Over Index takes each of the subcomponents and uses a sophisticated statistical process to normalize and index each data series into an overall score for each of the three drivers. The combined aggregated data helps to measure the likelihood that the economy is showing signs of overactivity and that we may be approaching a cyclical peak.

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.

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- 620241 (Exp. 6/18)

Market Update: Friday, June 23, 2017

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Yesterday’s Market Activity

  • U.S. stocks essentially flat, led by healthcare (+1.0%), which extended weekly performance leadership as Senate Republicans released Affordable Care Act overhaul plans. Biotech sector +1.3%, bringing weekly gain to ~10%.
  • Energy stocks stabilized as WTI crude oil +0.5% to $42.75/bbl.
  • COMEX Gold rose (~$1250/oz.) after five-day selloff, 10-year Treasury yield fell 2 basis points (0.02%) to 2.14%.

Overnight & This Morning

  • Asian stocks mostly positive as MSCI Asia-Pacific Index had its first weekly gain in three. Shanghai Composite rose as MSCI’s addition of A shares to its global indexes outweighed concerns about regulatory crackdown, increasing scrutiny on cross-border deals. Nikkei had slight gains on yen weakness.
  • Europe slipped again. Poised to end week lower as food and beverages fell. Gilts led sovereign bonds lower.
  • Pound rose ($1.27), paring weekly decline vs. dollar.
  • As Brexit negotiations continue, approval growing from Germany’s Merkel toward U.K.’s May.
  • Euro is up ($1.11) vs. dollar.
  • Commodities – WTI oil is steady; headed for fifth straight weekly decline on oversupply concerns.
  • Natural gas firming as production stabilized following Tropical Storm Cindy.
  • U.S. stocks up slightly as oil ($42.95/bbl.) stabilizes.
  • Dollar lower vs. major currencies, yield on 2-year Treasury ~1.34%.
  • New home sales forecast +3.7% in May from April, which saw decline >10.0%.

 

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Key Insights

  • Financials – After the close yesterday, the Federal Reserve (Fed) released results of its stress tests, designed to show how the largest banks would perform under periods of extreme duress in the U.S economy. Thirty-four of the largest U.S. banks cleared the minimum thresholds for capitalization levels. Since 2008, the largest U.S. banks have added more than $750 billion in common equity capital, with a focus on more reasonable leverage, often including an emphasis on safer and less profitable businesses. In recent years, the banks have essentially figured out the process in order to succeed.
  • Next week, a more important report comes out for shareholders of the largest banks. The Fed will release its Comprehensive Capital Analysis and Review, which indicates whether banks can increase dividends and buy back shares. Given yesterday’s results, it appears that banks will be able to free up more than $100 billion to return to shareholders.
  • Treasury Secretary Steven Mnuchin has proposed a less onerous review process going forward, including less frequent stress tests, exempting highly capitalized banks, and removing some of the toughest hurdles. In addition, changes in the Fed’s regulatory leadership, as well as the potential for a shift in the composition of the Fed’s Board of Governors next year, indicate the potential for increased lending.
  • Our view remains favorable for the financials sector, considering valuations, dividends & buyback prospects, and improved net-interest margins from a steeper yield curve.

 

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Click Here for our detailed Weekly Economic Calendar

Friday

  • Markit Mfg. & Services PMI (Jun)
  • New Home Sales (May)
  • France: GDP (Q1)
  • France: Markit France Mfg. & Services PMI (Jun)
  • Germany: Markit Germany Mfg. Services PMI (Jun)
  • Eurozone: Markit Eurozone Mfg. & Services PMI (Jun)
  • Russia: GDP (Q1)
  • Canada: CPI (May)

 

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.

 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 # 1-620224

 

Oil Formed A Death Cross: Is That Good Or Bad?

On May 30, 2017, the crude oil (WTI) daily price chart triggered what market technicians call a moving average “death cross” event. This occurs when the shorter-term 50-day simple moving average (SMA) crosses below its longer-term 200-day average (Figure 1). However, based on historical data, this may indicate that the commodity is in its initial stages of stabilization and a bottoming process.

Some market participants believe that when the shorter-term SMA moves below the longer-term SMA a bearish trend will persist; but this may not always be true. In some cases, the price begins to stabilize and move higher shortly after the crossover takes place.

Figure 1.

Looking at 32 years of historical data on the crude oil (WTI) daily chart, there were 23 instances when the 50-day SMA crosses below the 200-day SMA. Subsequent price returns tended to be flat to modestly lower for approximately three months before stabilizing and moving higher over the next six-to-nine months (Figure 2).

Figure 2.  Data:  1985 – June, 2016

Often, a death cross event is the after effect of a bearish intermediate-term price trend and tends to be a lagging indicator of future market direction.  Oil price patterns may have just triggered a death cross, but current market conditions and historical data suggest a period of price stabilization may be likely which could signal the beginning stages of a bottoming process.

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 fast price swings in commodities and currencies will result in significant volatility in an investor’s holdings.

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, geopolitical events, and regulatory developments.

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 # 1-619936 (Exp. 6/18)