Market Update: Wednesday, March 30, 2016

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  • S&P and Dow close at highest point this year. Stocks rallied on Tuesday, spurred on by Federal Reserve Bank (Fed) Chair Janet Yellen’s dovish speech at the Economic Club of New York. The risk-on mentality drove all 10 sectors into the green, with technology the best performing sector on the day. Utilities followed closely behind, up 1.4%, as Yellen’s speech exacerbated the hunt for yield and sent 10-year Treasury yields down 0.09% to 1.80%. The price of WTI crude oil declined 2.7%, while COMEX gold advanced 1.3% to $1,235.80/oz. Final tallies: Dow +97.72 to 17633.11, Nasdaq +79.84 to 4846.61, S&P 500 +17.96 (+0.88%) to 2054.99.
  • Risk on continues following Yellen comments. U.S. equities are holding early gains following an in-line ADP payroll report. Overseas, yesterday’s comments from Fed Chair Yellen spurred buying in Asia overnight, though Japan’s Nikkei fell 1.3% as transportation and exporter stocks weighed on the index in the face of yen strength. Meanwhile, European markets are getting a boost from mining and energy companies as dollar weakness buoys commodities, including oil; though gold is moving lower amid buying in risk assets. Treasury yields on the longer end of the curve are inching higher after yesterday’s big drop.

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  • Fed Chair Yellen reaffirms Fed’s tolerance for more inflation. In a long speech to the Economic Club of New York, Fed Chair Yellen reiterated the view expressed in mid-March by her and her colleagues on the Federal Open Market Committee (FOMC) that any rate increases this year would be gradual, and of course, “data dependent,” and that the Fed’s main concern right now is weak global growth. The appearance was seen as “push back” against comments made by a few of her FOMC colleagues in recent weeks that inflation is a concern and an April rate hike may still be on the table. As a result of Yellen’s comments, the dollar weakened, and risk assets and inflation expectations rose. We continue to expect that the Fed will raise rates at least two more times in 2016. Please see our Weekly Economic Commentary, “The Fed’s Spring Surprise,” for more details.
  • Solid March ADP employment report should further reduce U.S. recession fears and support the Fed’s view that labor market is tightening. ADP–the nation’s largest payroll processing firm–reported this morning that its tally of private sector payrolls increased by 200,000 between February 2016 and March 2016. The March reading was above expectations (+195,000) and roughly in-line with the +205,000 reading in February, which was revised lower after being initially reported as a 214,000 increase in early March. More importantly, the +200,000 reading in March and the +200,000 average gain over the past 12 months is well above the roughly 125,000 to 150,000 jobs per month cited by various Fed officials as the pace needed to indicate “some further improvement” in the labor market. Although ADP provides an early look at payrolls each month, the report in recent years has become a less reliable predictor of the U.S. Bureau of Labor Statistics (BLS) employment report. The BLS will release the March 2016 Employment Situation report on Friday, April 1. The consensus is looking for an increase of 190,000 jobs, an unemployment rate of 4.9%, and a 2.2% year-over-year increase in average hourly earnings.
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    Bulls march on in March. The S&P 500 gained nearly 0.9% yesterday after the comments from Yellen, the best one-day gain in more than two weeks. In fact, the 2055.01 close for the S&P 500 was the highest close so far this year; it is now up 0.5% for the year. As we head into the last two days of the month, March is now up by 6.4%, the best monthly return since October 2015. Interestingly, the last two days of March have been positive for the past six years. With the S&P 500 back to positive for the quarter, this could be the first quarter since the Great Depression to be down by at least 10% and close in the green. In other words, the drop and reversal higher we’ve seen so far this quarter is once a generation.

  • Year-end return target not far away. The low end of our stock market forecast from the Outlook 2016 is within reach–the low end of “mid-single-digits” is just 2-3% away*. Returning to the S&P 500’s all-time high (set March 21, 2015) would require just a 3.6% gain from current levels and, in the near term, we believe may present some resistance. Stock market positives are numerous: a resilient U.S. economy, prospects for a second-half earnings rebound on greater oil and U.S. dollar stability, low interest rates, more prudent policymaking in China, and the historical tendency for stocks to perform well after the start of a Fed rate hike campaign. However, we believe downside risk may slightly outweigh upside potential in the short term; we continue to generally slightly underweight equities in model portfolios while awaiting further improvement in the macroeconomic picture. We suggest maintaining some excess cash to maintain slightly below-benchmark portfolio risk and provide flexibility to potentially buy a dip.
  • 2016 Retirement Environment Index released. The LPL Research Retirement Environment Index seeks to discover the complicated answer to the simple question: Which state is most desirable for pre-retirees? Based on six categories, the index ranks states on their preparedness and desirability for the pre-retiree cohort. The index can be used as a financial planning tool to help address state attributes that are most important to pre-retirees. No single state ranked in the top across all categories, although once again, Virginia assumes the top spot, while California anchors the bottom. Review the details behind the rankings, as well as regional trends, in the full publication.

     

    *Historically since WWII, the average annual gain on stocks has been 7 – 9%. Thus, our forecast is in-line with average stock market growth. We forecast a mid-single digit gain, including dividends, for U.S. stocks in 2016 as measured by the S&P 500. This gain is derived from earnings per share (EPS) for S&P 500 companies assuming mid-to-high-single-digit earnings gains, and a largely stable price-to-earnings ratio. Earnings gains are supported by our expectation of improved global economic growth and stable profit margins in 2016.

 

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Wednesday:

  • ADP Employment (Mar)
  • Germany: CPI (Mar)

Thursday:

  • Challenger Job Cut Announcements (Mar)
  • Dudley (Dove)
  • Germany: Unemployment Change (Feb)
  • UK: Money Supply and Bank Lending (Feb)
  • China: Official Mfg. PMI (Mar)
  • China: Caixin Mfg. PMI (Mar)
  • Japan: Tankan Survey (Mar)

Friday:

  • Employment Report (Mar)
  • ISM Mfg. (Mar)
  • Consumer Sentiment and Inflation Expectations (Mar)
  • Vehicle Sales (Mar)
  • Mester (Hawk)
  • Germany: Retail Sales (Feb)
  • Japan: Vehicle Sales (Mar)

 

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.

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.

This research material has been prepared by LPL Financial LLC. 

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