Market Update: Tuesday, May 31, 2016


  • Stocks set to post another month of gains. Major U.S. indexes are modestly higher this morning as traders prep for a string of key economic data this week, capped off by U.S. nonfarm payrolls on Friday that may sway the Federal Reserve Bank’s (Fed) decision on a rate hike when it meets next month. Today’s action follows a 2.3% rise in the S&P 500 last week, led by technology stocks, though financials also got a boost from hawkish comments on Friday from Fed Chair Janet Yellen. Overseas, a 3.4% jump in the Shanghai Composite lifted Asian markets overnight, while European shares are range bound after consumer prices and employment figures came in as expected. Elsewhere, the dollar continues to strengthen, pushing down precious metals; WTI crude oil is moving in and out of positive territory, and the yield on 10-year Treasury notes is higher after ending last week at 1.85%.


  • High-quality bond yields marginally changed for the weekTreasury yields remained within broader ranges with little change on the week. Of note, the yield curve, as measured by the yield differential between 2- and 10-year Treasuries, closed at 0.94%–back to a post-recession low; in addition, inflation expectations have begun to decline despite continued strength in oil prices. Fed fund futures show a 70% probability of a hike at either the June or July Fed meeting. These last points suggest the bond market continues to express skepticism of any rate hike.
  • Record investor demand at last week’s Treasury auctions. Despite Treasury yields not far above 2016 lows, the Treasury’s auctions of 2-, 5-, and 7-year securities collectively witnessed record investor demand, both domestic and foreign, as dealers accordingly took down a record low percentage of the auctioned bonds. The demand is a reflection of still negative investor sentiment, and the combination of foreign central bank easing coupled with Treasuries’ yield advantage to other high-quality government bond markets.
  • Average high-yield bond spread closes below 6%. High-yield bonds and oil remain tightly correlated, as continued oil price resilience support additional price gains for high-yield bonds. The average yield spread declined to 5.9% last week, increasing an already impressive rebound. Still, high-yield bonds remain very sensitive to oil prices, which presents a risk. We view high-yield bonds as fair to slightly expensively valued given the expected continued rise in defaults. We discuss high-yield bonds in more detail in this week’s Bond Market Perspectives publication, due out later today.
  • Municipal bond valuations cheapen slightly after several weeks of improvement. Average 10- and 30-year AAA municipal-to-Treasury yield ratios increased to 92% and 99%, respectively, up slightly on the week from 90% and 98%. After municipal bond prices lagged comparable Treasuries during the first quarter of 2016, municipal bonds had richened versus Treasuries for most of the second quarter until modest weakness last week. Elevated selling and higher new issuance weighed on the market; but better balance greets the market ahead of a traditionally challenging month of June, which has posted negative returns in 7 out of the past 10 years.
  • April spending points to Q2 GDP around 3.0%. Inflation-adjusted personal spending, which accounts for two-thirds of gross domestic product (GDP), was running 3.0% above its Q2 average according to data released earlier this morning, effectively putting a floor on Q2 GDP. This morning’s robust April spending data keeps the Fed on track to raise rates by 0.25% at either the June or July Federal Open Market Committee (FOMC) meeting.
  • GDP gap. This week’s Weekly Economic Commentary, due out later today, discusses the unusual gap that has opened up in the past 10-20 years between Q1 and Q2 GDP. Over long periods of time, GDP growth in any one quarter should be close to any other quarter; but over the past 10 years, GDP growth in Q1 has averaged -0.3% while Q2 growth has averaged 2.4%, and Q1 GDP has been the slowest quarter of growth in 6 of the past 10 years.
  • Japan further delays sales tax increase. The Japanese government again decided to delay the implementation of a second round of increases to its value-added tax (VAT), a type of sales tax. This move was widely expected, though the government announced intentions to delay the tax increase until 2019, which was a surprise. This may portend additional policy actions by the Bank of Japan at its meeting on June 2. Japanese industrial production increased 0.3% during the first quarter, well ahead of the expectation of a -1.5% decline. Overall, the yen weakened and Japanese equities rallied on this news.
  • Strong gains last week. The S&P 500 gained 2.5% last week, its best weekly gain in 12 weeks. It is now looking at its first three-month win streak in two years. The recent strength comes on the heels of the first three-month losing streak in more than four years. In fact, this could be the fourth straight year May finished in the green. Lastly, today is the last day of the month and this day has been weak lately, down in 8 of the past 10 months.
  • Everyone is neutral. With the S&P 500 less than 2% away from a new all-time high, there isn’t much excitement. In fact, the recent American Association of Individual Investors (AAII) sentiment poll showed nearly 53% of those polled were neutral. This was the highest neutral level in 26 years. Given how frustrating things have been to bulls and bears alike, the camp of neutral seems to be the place to be. Today on the LPL Research blog we will take a closer look at this development and what it could mean for future S&P 500 gains.
  • Jam-packed June. As discussed in this week’s Weekly Market Commentary, due out later today, June is filled with major market events that may go a long way toward determining the near-term direction of the equity markets. They include an OPEC meeting, central bank meetings for the Fed, European Central Bank, and Bank of Japan, as well as the “Brexit” vote, a referendum on whether the U.K. will remain in the European Union.
  • Week ahead. The May jobs report, the Fed’s Beige Book, an OPEC meeting, a European Central Bank meeting, as well as May reports on vehicle sales, manufacturing, and the service sector Institute for Supply Management (ISM) are all on the docket this week as markets begin what is shaping up to be a critical month of June. Please see our Weekly Global Economic and Policy Calendar for details.



  • Personal Income and Spending (Apr)
  • PCE Inflation (Apr)
  • Dallas Fed Mfg Index (May)
  • Eurozone: CPI (May)
  • Eurozone: Money Supply and Bank Lending (Apr)
  • China: Official Mfg. PMI (May)
  • China: Official Non-Mfg. PMI (May)
  • China: Caixin Mfg. PMI (May)


  • ISM (May)
  • Vehicle Sales (May)
  • Beige Book
  • UK: Money Supply and Bank Lending (Apr)
  • OECD Economic Outlook Released
  • Brazil: GDP (Q1)


  • Challenger Job Cut Announcements (Apr)
  • ADP Employment (May)
  • OPEC Meeting in Vienna
  • Eurozone: European Central Bank Meeting (No Change Expected)


  • Employment Report (May)
  • ISM Non-Mfg. (May)
  • Evans (Dove)


  • Mester (Hawk)


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.

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