Will Municipal Bonds March Lower?

Believe it or not, March is nearly upon us. This is positive news for those looking forward to melting snow and warmer temperatures, but it’s less exciting for municipal bond investors as March has historically been a difficult month for the municipal bond market, as the chart below shows. What are the causes of March weakness, and can we expect a similar situation this year?

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There are several reasons for this weakness, first of which is a difficult seasonal period for the broader bond market. Moves in Treasury markets tend to drive other fixed income sectors, and this time of year usually sees a seasonal increase in Treasury issuance ahead of tax refund season. We see no reason that this year should be different than past years in this respect.

A second factor is supply in the municipal market itself. Municipal supply tends to wind down toward the end of the year, and stay below average in January and February before ramping up in March. December of 2016 saw higher-than-average volume as municipalities pushed to get deals priced ahead of the Federal Reserve’s well-telegraphed December rate hike, but since that time, supply has contracted as expected although it is likely that supply will pick up as we head toward March.

A final factor is tax-related selling. Investors often need to sell assets in order to pay tax bills and the municipal pullback in the fourth quarter of 2016 means that many investors may have unrealized losses,  making the asset class a more attractive sale candidate.

While history is not a guarantee of the future path of markets, it seems that all of the factors are falling into place for another weak March for municipal bonds.  We will continue to monitor developments and share our observations on the LPL Research blog.

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.

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.

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 rates rise. Interest income may be subject to the alternative minimum tax. Federally tax free but other state and local taxes may apply.

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.

The Bloomberg Barclays U.S. Municipal Bond Index covers the USD-denominated long-term tax-exempt bond market. The index has four main sectors: state and local general obligation bonds, revenue bonds, insured bonds, and prerefunded bonds.

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 # 1-584600 (Exp. 02/18)

Market Update: Thursday, February 23, 2017

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  • Stocks search for direction in early trading. (9:57am ET) Following a mixed session that saw the major averages close little changed, stocks are near flat again today. Yesterday’s session saw the S&P 500 and Nasdaq both lose 0.1%, while the Dow (+0.2%) managed to post its ninth consecutive daily gain. Utilities (+0.4%) and materials (+0.3%) were the best performers on the day, while energy dropped 1.6% as oil closed below $54/barrel. Equities in Asia closed mostly lower overnight; the Shanghai Composite lost 0.3% and Japan’s Nikkei finished flat. European markets are similarly little changed (STOXX Europe 600 +0.1%) as the euro and French politics remain in focus. Interest rates are moving lower across the board this morning; the yield on the 10-year note sits at 2.40%. Meanwhile, the dollar is slightly lower following yesterday’s release of Federal Reserve (Fed) minutes, WTI crude oil ($54.70/barrel) is up 2.1%, and COMEX gold ($1250/oz.) is up 1.3% and looking to break out of a multi-week consolidation.

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  • No signal from claims. Initial claims for unemployment insurance remained pinned close to 40-year-plus lows in the latest week, and continue to suggest that the labor market is tightening. Our work has found that claims do provide a recession signal when they rise between 75,000 and 100,000 over a six-month period. Six months ago, claims were running in the 260,000 to 270,000 per week level. Over the last four weeks, claims have averaged 241,000 per week, so claims are running roughly 20,000 below six-month-ago levels and are not signaling a recession.
  • FOMC minutes. The Fed released the minutes of the January 31-February 1, 2017 Federal Open Market Committee (FOMC) meeting yesterday at 2 PM ET. The minutes noted that while “many” FOMC participants expressed the view that “it might be appropriate to raise the fed funds rate again “fairly soon” if incoming information on the labor market and inflation was in line with or stronger than their current expectations or if the risks of overshooting the Committee’s maximum-employment and inflation objectives increased.” Comments from Fed officials since that meeting have largely echoed those views, but the “center of gravity” at the Fed (Yellen, Dudley and Fischer) has been more cautious in its comments.  The Fed’s Beige Book is due out on March 1, 2017, Vice Chair Fischer and Chair Yellen deliver speeches on March 3 and the next FOMC decision is due on March 15. The fed funds futures market puts the odds of a March rate hike at 34%, but odds of a hike at the May (62%) and June (75%) meetings are well over 50%.
  • Dow win streak hits nine. The Dow is up nine days in a row for the first time since July 2016. It hasn’t been up 10 days in a row since March 2013. Since 1900, there have now been 32 nine-day win streaks, with the longest reaching 13 in a row in January 1987. What makes this current win streak so rare is it has taken place while also making record highs. The nine consecutive all-time highs is the most since 12 in a row during that January 1987 run. In fact, since 1900, the Dow has made record highs on nine consecutive days only five times.
  • Technology continues to soar. The FTSE US Technology Index is up an incredible 15 days in a row, an all-time record (previous record was 12 in July 2009). Incredibly, tech has been higher all 15 trading days this February, and with four more trading days left, has a shot at the record 18 up days during a month set in August 2000. Tech has been the true leader this year, which is impressive given the post-election weakness on potential policy concerns. Those concerns didn’t pan out and tech is close to breaking above its peak from 2000.

 

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Click Here for our detailed Weekly Economic Calendar

 Thursday

 Friday

  • New Home Sales (Jan)

 

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.

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 #1-584578

Don’t Short A Dull Market? There’s Nothing Duller Than Crude Oil

Crude oil closed at its highest level since July 2015 yesterday. This is obviously a positive, but is it a valid breakout and will higher prices be around the corner? We dove into the fundamentals, issues, and policies surrounding this important commodity in our latest Weekly Economic Commentary, but today we will take a look purely at the technical backdrop on crude oil.

First things first: The technical backdrop on crude oil is and has been bullish for quite some time. As the chart below shows, crude oil has completed a bullish inverse head-and-shoulders pattern, and as long as it stays above $50/barrel, this suggests potentially much higher prices. Remember, a head-and-shoulders pattern is a popular technical analysis pattern that forms at the end of major market moves and suggests the overall trend is changing. Given crude oil just had one of its worst bear markets ever, this is another step to a recovery and higher prices.

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The other point that caught our attention is how rangebound crude has been. Per Ryan Detrick, Senior Market Strategist, “For weeks now, it seems like crude has closed around either $52 or $53/barrel, and that is because it has. In fact, the past nine weeks have been one of the tightest ranges in crude oil ever. The old saying is ‘don’t short a dull market.’ Well, there isn’t much out there more dull than crude oil right now.”

Think about this: Crude oil hasn’t closed up or down 2% for 13 straight days, the longest such streak since June 2015. Then over the past nine weeks, crude oil traded in a range of just under 9%. This has only happened 6% of the time historically, and the last time it took place was July 2014, right ahead of the 75% drop in the following 19 months into the February 2016 lows. The good news is the two times before July 2014 when we saw a similar tight range, the prices were higher a year later. In December 2012 and November 1995, crude oil traded in a similar tight range as now and was up a year later 11% and 33%, respectively.

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There is no doubt that the technicals on crude oil remain firmly bullish, but the other side to the analysis shows there is no question that untapped U.S. supply could put a cap on any major rallies. We aren’t bearish on crude oil here and overall think a move higher is possible, but it will likely be capped near $60-$65/barrel. We will continue to monitor this important asset class should anything change.

 

IMPORTANT DISCLOSURES

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.

This research material has been prepared by LPL Financial LLC.

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

Selling short can result in losses should the borrowed security increase in price, rather than decline. The theoretical potential loss is unlimited. Additionally, short sales will incur interest on the borrowed shares while also being subject to margin calls, or early sales in the event that the original owner wishes to sell their position.

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 # 1-584104 (Exp. 2/18)