Market Update: Tuesday, April 5, 2016


  • Stocks retreat to start off week, oil continues to slide. Markets moved lower Monday amid hawkish commentary from Boston Federal Reserve Bank (Fed) President Eric Rosengren and a continued decline in the price of WTI crude oil, which closed below $36/barrel. Healthcare and telecom were the only sectors to finish positive on the day, while consumer discretionary and industrials led the market lower. The 10-year Treasury yield stayed put at 1.77% and COMEX gold moved down 0.3% to $1219.30/oz. Final tallies: Dow -55.75 to 17737.00, Nasdaq-22.75 to 4891.79, S&P 500 -6.65 (-0.32%) to 2066.13.
  • Equity declines continue as policymakers, data stoke growth concerns. U.S. equities are tracking foreign indexes lower in early trading after a string of disappointing data out of the Eurozone and downbeat comments from International Monetary Fund (IMF) Managing Director Christine Lagarde reignited global growth concerns. Overnight, volatility in oil added to negative sentiment–though prices have since recovered–spurring broad-based declines in Asia, led by a 2.4% drop in Japan’s Nikkei Index; China’s Shanghai Composite bucked the trend, rising 1.5%. Gold and Treasuries are benefiting as cash flows to safe havens.


  • Bonds post strong quarter but a repeat is unlikely. The high-quality domestic bond market, measured by the Barclays Aggregate, gained an impressive 3.0% in Q1 2016. Such strength is relatively rare and has not occurred since 2011. Gains were broad based, with all sectors benefiting from price gains. History shows that such strength tends to fade, but not necessarily reverse, at least over the short term. Still, lower yields and higher valuations suggest a much slower pace of performance going forward. This week’s Bond Market Perspective, due out later today, discusses Q1 performance and what to expect for the remainder of 2016.
  • Inflation expectations resume rise after Yellen comments. The rate of inflation implied by the spread between 10-year Treasuries and 10-year Treasury Inflation-Protected Securities (TIPS) increased by almost 0.1% last week, up to 1.7%, the highest level since August 2015. Stronger economic data have been one driver, but last week’s increase was largely due to rather dovish comments from Fed Chair Janet Yellen. The comments reinforced beliefs that the Fed may be willing to accept higher inflation in exchange for ensuring that economic growth becomes more robust, but the Fed is also running a potential risk of getting behind inflation. Inflation expectations remain low in a historical context, however.
  • Yield curve modestly steeper but finishes quarter at level suggestive of sluggish global growth. The yield curve, as measured by the 2- and 10-year Treasury yield differential, continued its recent modest steepening last week but has done little to offset the flatter yield curve trend that dominated much of the first quarter. Short-term bond yields have decreased in response to an increasingly dovish Fed, but economic data will have to improve further for yield curve steepening–and therefore, growth signals–to be more meaningful.
  • High-yield strength slows. Following several weeks of strength in high-yield bonds, the yield spread moved slightly higher for the week to end at 6.9%. The asset class also recorded its first outflows in six weeks, with $545 million leaving high-yield mutual funds according to Lipper, though this level is relatively small given that five of the previous six weeks had seen more than $1.5 billion in weekly inflows. Rather than signaling a reversal, recent action may merely reflect consolidation. With defaults still rising, the yield spread range of 6.5-7.0% represents roughly fair value, in our view, but an average yield of over 8% means coupon clipping can still provide meaningful return.
  • Ireland issues 100-year bond. Last week brought another stark example of how far global rates have fallen as Ireland joined Mexico as the second nation to issue a 100-year euro-denominated bond. The $113 million offering, which will allow Ireland to lock in historically low rates, is priced at just 2.35%. This is a far cry from the more than 14% yield that markets were demanding for even 10-year Irish debt just five years ago, while the country was working its way through the terms of its 2010 Eurozone bailout deal.
  • Yield gap between short- and long-term Municipal bonds at lowest since 2009. Like the taxable bond market, the municipal bond yield curve has flattened, with short-term rates higher and long-term rates lower. Nonetheless, the municipal yield curve remains steeper compared to that of the Treasury market, which has often been the case historically. The Barclays Municipal Bond Index lagged the corresponding Barclays Treasury Index during Q1 2016, which is not uncommon during periods of notable yield declines, but gains totaled 1.7%.
  • Here comes the second quarter. We’ve noted how strong April has been recently for equities, with the S&P 500 up 9 of the past 10 years. At the same time, May and June are two of the weaker months. Taking a big picture look at the second quarter, since 1950, the S&P 500 has gained 1.7% on average during the second quarter. This comes in beneath both the fourth quarter and first quarter. Taking a look at how the second quarter has done during an election year (like 2016), lately this quarter has been weak. In fact, since 1990, this quarter has been lower three of the past four election years. Today on the LPL Research blog we will take a closer look at the second quarter and break it down several different ways.
  • First quarter earnings results will not be very exciting but the earnings trajectory may be at a trough. We would love to say that the season will bring better results than recent quarters, but that appears unlikely. In fact, as we previewed in this week’s Weekly Market Commentary, consensus estimates are calling for a 7% year-over-year decline in S&P 500 earnings for the quarter, the worst since the Great Recession and the third straight quarterly decline based on Thomson data. On a brighter note, this quarter may mark an inflection point in terms of the trajectory of earnings because the pressure from oil weakness and U.S. dollar strength is starting to let up. That means management teams’ popular excuses for explaining shortfalls probably won’t work anymore.
  • Trade gap widens more than expected in February. In this week’s Weekly Economic Commentary, “Checking in on Trade,” we note that the U.S. has run a large and persistent trade deficit for decades, but that the imbalance is all on the goods side, not the services side, where we have a trade surplus. It was no different in February 2016, as a $65 billion trade deficit in goods (cars, computers, oil, apparel, textiles, household goods, toys, etc.) more than offset the $18 billion trade surplus on the services side (legal, financial, consulting and engineering services, education,  entertainment, intellectual property, etc.) The wider than expected trade gap in February keeps real gross domestic product (GDP) on track for gains of between 1.5% and 2.0% in Q1. Q1 GDP will be reported at the end of April.



  • ISM Non-Mfg. (Mar)
  • JOLTS (Feb)
  • Eurozone: Retail Sales (Feb)
  • India: Reserve Bank of India Meeting (Rate Cut Expected)
  • China: Caixin Services PMI (Mar)


  • FOMC Minutes
  • Mester (Hawk)
  • Singapore: GDP (Q1)


  • Yellen (Dove), Volcker, Greenspan, and Bernanke


  • China: New Loan Growth and Money Supply (Mar)
  • Japan: Economy Watchers Survey

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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