Market Update: Thursday, March 24, 2016

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  • Stocks fall as oil drops back below $40. A 3.5% drop in the price of WTI crude oil caused energy and materials to lead U.S. indexes lower on Wednesday. Additional uncertainty was cast on the markets by hawkish comments from St. Louis Federal Reserve Bank (Fed) President Bullard. Defensive stocks caught a bid, as consumer staples and utilities were the only sectors to close up on the day. COMEX gold moved 2% lower, while the yield on the 10-year Treasury was pushed down 0.06% to 1.88%. Final tallies: Dow -79.98 to 17502.59, Nasdaq -52.80 to 4768.86, S&P 500 -13.09 (-0.64%) to 2036.71.
  • Investors turn defensive ahead of long weekend. U.S. equities are tracking European indexes lower as traders take profits after five weeks of gains. Dollar strength, spurred by recent hawkish comments out of the Fed, continues to pressure commodities and related stocks, which led Asian equities lower overnight; China’s Shanghai Composite led the decliners, falling 1.6%. Growing U.S. stockpiles are also contributing to further oil weakness, gold is trending back toward par, and yields on 10-year Treasuries are little changed.

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  • Is the S&P 500 really overbought? There has been a lot of talk about how overbought equities are after the big run-up the past six weeks. One way to assess this is by looking at the percentage of stocks in the S&P 500 above their 50-day moving average. For only the 14th time since 1990, more than 90% of the stocks in the S&P 500 are above their 50-day moving average. Conventional wisdom suggests this means equities are extended and ripe for a pullback. The only issue is that conventional wisdom in this case is wrong, as a month later the S&P 500 is up 2.3% on average; three months later, it’s up 5.1% on average. Today on the LPL Research blog we will take a closer look at this phenomenon.
  • Win streak over? After a loss yesterday, the S&P 500 is down 0.6% for the week. With futures lower right now, this could be the first losing week after five consecutive higher weeks. In fact, if the S&P 500 is red today, it would be the first three-day losing streak since early February. Nonetheless, the S&P 500 in March is still up 5.4% for the month, so some weakness could be perfectly normal. Don’t forget, going back the past 10 years, April is the strongest month historically and March is the second strongest month. That seasonality has played out well so far.
  • New claims for unemployment rose 6,000 to 265,000 in the week ending March 19. The four-week average fell to 260,000. Claims continue to remain near historically low levels and are close to the lows seen last summer and fall, which were the lowest in 42 years (1973). Claims in the past 26 weeks are down 2,000. In the past, claims need to rise more than 75,000 over a six-month period to indicate recession, so clearly there is no recession signal from claims. The level of claims continues to point to a solid labor market. Please see the Weekly Economic Commentary, “What Do Claims Claim?” for more details
  • Core durable goods shipments and orders fall short of expectations in February; January data were revised lower. New orders for durable goods fell 2.8% in February, in-line with consensus expectations, with weakness across all categories as the lingering effects of a strong dollar and lower oil prices continue to impact the manufacturing sector. New orders of core capital goods were once again under pressure after showing a brief positive respite in January. Shipments also declined in the month. On a year-over-year basis, core capital goods orders were down 0.1% in February. While the manufacturing sector, which accounts for 12% of the domestic economy, has been under pressure for some time, there have been some signs of healing in recent days. Several reports indicated a pickup in regional factory activity in March, which combined with a stabilizing dollar and oil could relieve some pressure.
  • Key March data on jobs, consumer spending, and manufacturing highlight next week’s busy economic calendar. In the lull between the major central bank meetings of early to mid-March and the start of Q1 earnings reporting season in mid-April, markets will be assessing the health and trajectory of the U.S. and global economies. Data due out next week in the U.S. on the Institute for Supply Management (ISM) manufacturing index, vehicle sales, employment, and wages for March are crucial to that assessment. In addition, data on pending home sales, home prices, exports and imports, and construction spending in February will help to solidify Q1 gross domestic product (GDP) estimates. It’s a relatively quiet week for the Fed next week with a few hawks and a few doves on the docket, most notably New York Fed President Bill Dudley. Overseas, it’s a quiet week for central banks, China will release its March manufacturing data, Japan will release the crucial Tankan Survey for March, and data in the Eurozone and U.K. on bank lending and money supply will be closely watched.

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Thursday:

  • Durable Goods Shipments and Orders (Feb)
  • Markit Mfg. PMI (Mar)
  • Eurozone: Markit Mfg. PMI (Mar)
  • Taiwan: Central Bank Meeting (Rate Cute Expected)
  • Japan: Tokyo CPI (Mar)
  • Japan: CPI (Feb)

 

Click Here for our detailed Weekly Economic Calendar

 

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. 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.

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.

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