- Bank stocks lead market higher. The major averages advanced on Wednesday, led by financials after J.P. Morgan reported better than expected earnings. Traditionally defensive sectors were left behind in the rally, as consumer staples, telecom, and utilities all closed lower. Bonds reversed early losses, with the 10-year Treasury yield finishing down 0.01% at 1.76%. COMEX gold and WTI crude oil each slipped 1%, ending the day at $1248.30/oz. and $41.70/barrel, respectively. Final tallies: Dow +187.03 to 17908.28, Nasdaq +75.33 to 4947.42, S&P 500 +20.70 (+1.00%) to 2082.42.
- Markets flat as earnings and inflation in focus. The financials sector is in the spotlight as both Bank of America and Wells Fargo released earnings before the opening bell. Investors are also digesting Consumer Price Index (CPI) data that rose in March, but fell just short of expectations. Overseas, Japan’s Nikkei Index has snapped back 7.3% over the last three sessions, with the yen showing weakness for the first time this month. In Europe, markets are flat as traders digest Eurozone earnings and CPI reports. Oil is slightly higher as hopes continue for a production freeze. The 10-year Treasury yields are up a couple of basis points and gold continues yesterday’s slide.
- Beige Book better. The latest Beige Book suggests that the U.S. economy is still growing near its long-term trend, and that the drag on U.S. manufacturing and exports from a stronger dollar and weaker energy prices may be fading a bit. Our proprietary Beige Book Barometer (BBB) ticked up to +73 in April from the +39 reading in March. Perhaps most importantly, as it relates to potential Federal Reserve Bank (Fed) rate hikes later this year, the comments in the Beige Book also continue to indicate that some upward pressure on wages is beginning to emerge and the use of inflation words remained elevated. Please see our blog for more details.
- Inflation returns in March as oil bounces and services inflation still running well above trend. Led higher by a 1% gain in consumer energy prices, the CPI posted a 0.1% month-over-month increase in March 2016 and was up just 0.9% year over year (YOY). Service sector inflation (two-thirds of CPI) rose 0.2% between February and March and was up 2.7% YOY, a reading that is well above the post-recession trend rate of around 2%. This 2.7% YOY increase in services was more than enough to offset the 2.1% YOY drop in commodities inflation (one-third of CPI). Driven lower by consumer energy prices, the YOY change in the CPI moved from 2.1% in mid-2014 to -0.2% in April 2015, and has been gradually heading higher since then. We continue to expect that a tightening labor market, the easing of oil price declines, and better wage growth will push inflation higher over the course of 2016, allowing the Fed to be reasonably confident that inflation will return to 2.0%.
- New claims for unemployment fell 13,000 to 253,000 in the week ending April 9, but early Easter/spring break continues to distort the data. The initial claims data are notoriously difficult to seasonally adjust, especially around moveable holidays like Easter, and that appears to be the case over the past few weeks. Claims rose 11,000 in the week ending March 25, fell 9,000 in the week ending April 2, and fell another 13,000 this week. Looking through the distortions, 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 are down 9,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) 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.
- Breadth continues to be strong. One way to measure market breadth is looking at the advance/decline line (or A/D line) for various indexes. An A/D line simply compares how many stocks are advancing on a daily basis versus declining. The thinking is if more stocks are advancing than declining, that is an underlying sign of strength. Vice versa, if more stocks are declining than advancing, that is a clue about weakness under the surface. Yesterday the NYSE A/D line, the S&P 500 A/D line, and the S&P Mid Cap A/D line all reached new all-time highs, while the Dow A/D line and the S&P 500 Small Cap A/D line hit new highs for 2016. This type of broad-based strength suggests there is substantial strength under the surface. Take note, this doesn’t mean there can’t or won’t be a pullback–but the odds of a new bear market starting now with internals this strong is rather slim.
- Is the crude oil and equity correlation breaking down? The S&P 500 gained 1.0% yesterday, to close at its highest point this year–up 1.9% for the year. Additionally, the S&P 500 is now up 1.1% in this historically strong month of April, and the second half of this month is usually stronger than the first. Also, the S&P 500 is now only 2.3% away from its all-time high set on May 21, 2015. What stood out in yesterday’s activity was that crude oil fell slightly, yet the S&P still gained 1%. So far this year we have seen historic correlation between crude oil and equities. Could this tie between the two be breaking? It is probably too early to tell, but we will continue to watch this closely. Out of the last 15 times the S&P 500 gained 1%, yesterday was only the second time that crude finished red on that same day. Lastly, today on the LPL Research blog we will take a closer look at the second half of April strength.
- Drug spending gains support positive healthcare view. Total spending on prescription drugs in the U.S. rose 12.2% in 2015 according to market research firm IMS Health. New treatments and (controversial) price increases drove the gains–and likely with a little help from demographics. Drug spending does face political headline risk and budget pressures, but we believe the market is now pricing in an overly pessimistic outlook based on the drug industry’s relative valuations.
- CPI (Mar)
- Lockhart (Dove)
- IMF’s Christine Lagarde speaks on the Global Economic Outlook in Washington, DC
- UK: Bank of England (No Change Expected)
- China: GDP (Q1)
- China: Industrial Production (Mar)
- China: Retail Sales (Mar)
- Empire State Manufacturing Index (Apr)
- Consumer Sentiment and Inflation Expectations (H1 Apr)
- IMF and World Bank hold their spring meetings in Washington, DC
- Official campaign for UK’s EU referendum begins (Vote on June 23, 2016)
China: Property Price Indexes (Mar)
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.
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