2017 has been an extraordinary year for the S&P 500 Index thus far in terms of its lack of volatility and pullbacks. This has many wondering whether the bullish trend can continue; however, price action closely resembles 1995―which marked the beginning of a multi-year bullish trend for stocks.  So are equities setting up for a larger pullback and increased volatility, or should we party like it’s 1995?

Looking at historical data going back to 1950; a majority of the pullbacks in the S&P 500 have been in the -3 to -10% range (Figures 1 & 2), occurring 314 times with average and median returns of -5.6% and -5.4%, respectively.  Though pullbacks of more than 15% occurred just 20 times during this time period, the average and median returns of -24.6 and -23.6, respectively, suggest that when equities fell more than 15% they were likely to continue below the 20% threshold into what many technicians may identify as a bear market.

So far this year, the index has generated five shallow pullbacks with an average return of -2.0%, which is better than the long-term average of -5.6%; and according to statistics, that increases the likelihood for a reversion to the mean scenario and increased volatility.  However, comparing annual statistics for pullbacks and volatility, this year closely resembles 1995, which began a multi-year bullish trend for stocks (Figure 1).

Can the market continue to operate in a series of shallow pullbacks?  Statistics suggest a pullback of more than 2% before the end of the year is likely; however, one way to interpret the data is if in fact current trend conditions are like that of 1995, and the long-term bull market continues to be robust, then any short-term weakness in stocks may present an opportunity to buy on a dip.

IMPORTANT DISCLOSURES

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

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

The Standard & Poor’s 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.

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.

Indexes are unmanaged and cannot be invested into directly. Unmanaged index returns do not reflect fees, expenses, or sales charges. Index performance is not indicative of the performance of any investment. Past performance is no guarantee of future results.

The Chicago Board Options Exchange Volatility Index reflects a market estimate of future volatility, based on the weighted average of the implied volatilities for a wide range of strikes. 1st & 2nd month expirations are used until 8 days from expiration, then the 2nd and 3rd are used.

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.

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

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Tracking # 1-635660 (Exp. 08/18)

Yesterday’s Market Activity

• Stocks fell, bonds rallied as markets digested Fed, ECB minutes which highlighted concern over weak U.S. inflation, strong Euro. Dow (-1.24%) ended four day winning streak, S&P 500 Index -1.54%, NASDAQ -1.94%. Market weakness exacerbated as political issues persisted with disbanding of two CEO Advisory boards by the President.
• Treasuries strengthened as risk-off assets rallied with 10-year yield -0.04% to 2.19%. 30-year Treasury yield fell 3 basis points (0.03%) to 2.77%.
• U.S. Dollar Index +0.14% after Fed minutes. Euro weakness after ECB commented on concerns that the Euro would overshoot led the dollar higher.
• Commodities – Precious metals rose amid flight to quality (COMEX gold +0.7%); copper fell, WTI crude oil (+0.7% to $47.09/bbl.) rose.

Overnight & This Morning

• Asian markets mostly lower following U.S. weakness on Thursday. Nikkei (-1.2%), Hang Seng (-1.1%); Shanghai Composite was flat.
• European stocks slipping after multiple terrorist attacks in Barcelona yesterday and overnight. STOXX Europe 600 -0.8%.
• Crude oil ($47.20/bbl.) slightly higher after falling three of the previous four sessions.
• Metals broadly higher, led by gold (+0.8%), which is back over $1300/oz.
• U.S. stocks little changed to begin trading, 10-year Treasury yield at 2.18%.

Key Insights

• Politics and central banks weighed heavily on equity markets yesterday. Political issues, the Federal Reserve (Fed), the European Central Bank (ECB), and terrorist attacks in Barcelona all combined to lead risk assets lower. Additionally, rumors that a presidential advisor might not stay on with the administration-though the allegations were denied by the White House-led to speculation that the economic agenda might be in jeopardy. It is important to remember that one day does not make or break a market.
• Maintain a positive view of MLPs. Master limited partnerships (MLP) have significantly underperformed the equity market this year, trading generally in line with oil prices. However, the most important thing for them fundamentally is oil (and natural gas) production, more-so than prices, since their revenues are primarily based on volume transported. MLPs also have some correlation to bonds, but the bond market should be supportive of MLPs. As we noted in a previous Weekly Market Commentary, the pricing and market action of MLPs can be complicated. The market took an additional hit last week when one of the larger MLPs cut distributions, however, there have been very few distribution cuts this year. But when a major company does cut distributions, it influences the whole sector. However, our fundamental outlook remains strong; deregulation is happening, we don’t think rates rise very quickly, we think oil prices are below fair value, and yields provide a cushion. We would be careful not to get too heavy in commodity stocks but we believe a small direct allocation to MLPs can be appropriate for suitable investors.

Macro Notes

• Tough stance but we’re sticking with it. Relying on Republican unity to achieve tax reform and strike an 11th hour deal to raise the debt limit next month is a tough stance to defend. However, we continue to believe that the desire for a “win” among Republicans, the level of agreement on the primary tax issues, and the strength of leadership on the issue (solidified by the news that Gary Cohn plans to remain in his post) still suggests to us better than even odds of a tax deal. The next key milestone is the 2018 budget resolution, which must precede tax law changes because of the reconciliation process that enables passage with a simple 50-vote majority. Any developments that suggest budget talks may materially impair work on tax policy would be worrisome and are where we are focusing our attention in Washington, D.C.
• Putting yesterday’s drop in perspective. The S&P 500 fell 1.5% yesterday, for the second largest decline of the year. This was only the fourth 1% decline of the year, but it was the second 1% drop in a week. Additionally, three times in the past six days the S&P 500 closed either up or down at least 1%. This comes on the heels of going 58 consecutive days without a 1% change, the longest since 2014.
• Finally a big move for the Dow. Yesterday was the first time the Dow closed higher or lower by 1% in 63 trading sessions. That was the longest such streak since 69 in 1995. Going back in history since May 1896 (the inception of the Dow) shows the longest streak ever without a 1% change was 124 days in the first half of 1964. Take note, this incredible streak took place after John F. Kennedy was assassinated.

Click Here for our detailed Weekly Economic Calendar

Friday

• Univ. of Michigan Consumer Sentiment (Aug)
• Canada: CPI (Jul)

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.

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.

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 #1-635664

Market participants were able to gain some insight into the discussions at two recent central bank meetings as the Federal Reserve (Fed) and European Central Bank (ECB) released the minutes of their respective July meetings over the past two days. Inflation was a hot topic at both meetings.

The minutes of the Fed’s meeting showed a lively discussion on why inflation continues to trend below the Fed’s 2% target and what that means for the future path of rate hikes. More hawkish Fed members believed that waiting to raise rates could lead to an overshoot of inflation in the future, whereas a more dovish contingent felt that the Fed can wait until inflation starts to move higher. Although news stories have latched on to this division, this kind of discussion has been ongoing and will likely continue. Markets interpreted the discussion as slightly dovish on balance as fed funds futures show the odds of a December rate hike have fallen from 43% the day before the meeting to 38% currently.

Markets were also hoping for insight on when the Fed might begin its balance sheet normalization process. Though “several participants were prepared to announce a starting date for the program at the current (July) meeting,” we now know that didn’t happen, and consensus opinion continues to point toward a September announcement.

Last, the Fed continued to discuss the impact of easing financial conditions on asset valuations, stating that “vulnerabilities associated with asset valuation pressures had edged up from notable to elevated, as asset prices remained high or climbed further, risk spreads narrowed, and expected and actual volatility remained muted in a range of financial markets.” However, the potential risks to financial stability were deemed moderate on balance.

Markets interpreted this morning’s ECB meeting minutes as dovish as well. Persistently below-target inflation has been an issue in Europe for some time, and markets keyed in on language stating that concerns “were expressed about the risk of the exchange rate overshooting in the future,” which would exert further downward pressure on inflation if the euro continues to appreciate. This may limit the potential for the ECB to taper its quantitative easing purchases, as such a move would likely put more upward pressure on the euro.

The next official monetary policy meetings for the major central banks (Bank of Japan, ECB, and the Fed) take place in September, though central bank watchers will also be monitoring the Kansas City Fed’s annual Jackson Hole Symposium, which will be held August 24-26, 2017.

IMPORTANT DISCLOSURES

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.

The Federal Open Market Committee (FOMC) is the branch of the Federal Reserve Board that determines the direction of monetary policy. The eleven-person FOMC is composed of the seven-member board of governors, and the five Federal Reserve Bank presidents. The president of the Federal Reserve Bank of New York serves continuously, while the presidents of the other regional Federal  regional Federal Reserve Banks rotate their service in one-year terms.

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.

International and emerging markets investing involves special risks, such as currency fluctuation and political instability, and may not be suitable for all investors.

Market implied rate hike expectations are calculated based on the pricing of various fed funds futures contracts.

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 # 1-635467 (Exp. 07/18)