Market Update: Friday, February 19, 2016

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  • Rally sputters as oil, earnings weigh. Indexes snapped their three-day winning streak on Thursday after disappointing guidance from bellwether Walmart got the session off to a lackluster start, and a midday sell-off in WTI crude oil kept buyers sidelined into the close. The financial sector, which led recent advances, was among the day’s laggards following dovish comments from Federal Reserve Bank (Fed) President James Bullard, while telecom and utilities stocks managed to stay green. Investors returned to safe havens, boosting COMEX gold and Treasuries; the yield on the 10-year Treasury dropped 0.07% to 1.74%. Final tallies: Dow -40.40 at 16413.29, Nasdaq -46.53 at 4487.47, S&P 500 -8.99 (-0.47%) at 1917.76.
  • Global markets stumble after a strong week. U.S. and international indexes are mostly lower in Friday’s sessions as oil pares recent gains and investors turn cautious after the recent run-up; though stocks are still poised to lock in solid gains for the week. Continued yen strength coupled with falling oil kept the Nikkei well below par before finishing 1.4% lower overnight, but the index still rose 6.8% on the week. Shares in China followed a similar pattern, although they traded in a narrower range. European equities are awash in red over mixed economic data and anxiety around the European Union (EU) summit (for a possible Brexit). Meanwhile, Treasuries are holding steady, while gold and the dollar are advancing.

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  • The win streak is over. The S&P 500’s streak of 1% gains ended at three straight days yesterday. The three-day win streak ended as well. This was the 21st time in a row that after three 1% wins, the index didn’t have a 1% gain on the fourth day. Be sure to read the LPL Research blog (Macro Market Movers) for more information on three consecutive 1% gain streaks. We noted at the start of the month that February has been higher for six consecutive years; after the recent bounce, it was down about 1% for the month. What is impressive about this reversal is the S&P 500 was down 6.7% at its lows. The last two times that a month was down more than 6% and finished in the green were October 2014 and March 2009. There is still plenty of time in February, but this is something we will be watching.
  • Leading indicators still point to low chance of recession. The Conference Board’s Leading Economic Index (LEI) fell 0.2% month over month in January, in-line with expectations, but is still 2.2% higher year over year, a level that has historically been associated with a 10-15% chance of recession in the next year. The LEI is only one of a mosaic of indicators we monitor for potential recession risks. We would put the overall odds of a recession in the next year at approximately 30%, due to added risk from global growth uncertainty and tightening financial conditions.
  • Core inflation rises by most it has in more than four years, lends credence to Fed policy normalization. Consumer prices, excluding food and fuel, increased in January by 0.3% on a month-over-month basis and 2.2% on a year-over-year basis. These results represented a small upside surprise to consensus expectations. Contributing to the increase were higher prices for rent, medical care, and vehicles. The core data reflect an economy that is growing and a labor market that is tightening, two conditions that are supportive of the Fed’s recent decision for policy normalization. Including the effects of food and energy, consumer prices were unchanged month over month and increased 1.4% year over year. This measure is still below the Fed’s target and speaks to the continued pressure created by the supply issues facing the oil market. Given the level of core inflation, stabilization from the energy sector may be sufficient to get inflation closer to the Fed’s target level.
  • Leaders from the EU met yesterday and today. The main topic is the renegotiation for continued British participation in the EU. U.K. Prime Minister David Cameron has an agreement with representatives of the EU, but it must be confirmed by all nations. The Cameron government would like EU approval, which would help the government politically at home and may curb the desire to leave the EU. Should the EU reject this compromise, it would give strength to the anti-EU (Brexit) forces within the country. A vote within Britain itself may occur as early as June of this year.

 

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Friday:

  • CPI (Jan)
  • EU Leaders Summit

Saturday:

  • N/A

Sunday:

  • Japan: Nikkei Japan Mfg. PMI (Feb)

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.

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) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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.

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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.

 

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