- Equity markets, oil continue slide. Stocks in the U.S. and Europe are falling in Monday trade after stocks collectively shed more than $2 trillion in market value on Friday following the U.K.’s decision to leave the European Union. The S&P 500 fell 3.6% on Friday to close at 2037.41 as 9 out of 10 sectors lost ground. Financials (-5.4%) led the plunge, while utilities managed a slight gain. Overseas, many European exchanges are down another 2% today after some lost as much as 12% on Friday. In addition, the British pound has touched a fresh 31-year low against the dollar. In Asia, the Nikkei Index clawed back 2.4% of its steep losses from Friday and the Shanghai Composite gained 1.5%. WTI crude oil has dropped below $47/barrel, the yield on the 10-year Treasury has dipped below 1.48%, and COMEX gold is building on Friday’s strong rally.
- Fed now likely to raise rates just once here in 2016. In part due to the political and economic uncertainty created by the Brexit vote, we are reducing our forecast for Fed rate hikes over the remainder of 2016 from two to one, a forecast we have held since publishing our Outlook 2016 in November 2015. We acknowledge that if financial and economic conditions tighten more than we now expect, the Fed could remain on the sidelines all year. If the uncertainty surrounding the Brexit is relatively short-lived, the Fed could do two hikes this year; but our new base case is that the Fed does one hike this year, likely at the final Federal Open Market Committee (FOMC) meeting of the year in December 2016.
- Week ahead: Europe, Yellen, and China. Although the debate over the future of the U.K. in the EU is likely to dominate the headlines this week, markets will have some key economic data points to digest as well. The June Institute for Supply Management (ISM) data are due out on Friday, July 1, along with the June vehicle sales data–key reports on the health of the U.S. manufacturing sector and consumer as Q2 ends. Fed Chair Janet Yellen has an appearance on Wednesday, and China releases its manufacturing Purchasing Managers’ Index (PMI) data on Thursday and Friday. Other than the well-timed European Central Bank’s (ECB) forum on central banking, which runs during the first part of the week, there are no major central bank meetings scheduled this week, although central bankers are likely to be active in dealing with the aftermath of Brexit.
- Worst day of the year for equities. The S&P 500 dropped 3.6% on Friday for the first 3% drop in 210 days and the largest drop since August 24, 2015. It was also the third straight lower week for the index for the first time since late 2015 and early 2016. It hasn’t been down in four straight weeks since October 2014. A drop this big near an all-time high is rather rare. In fact, since the S&P 500 moved to 500 stocks in 1957, only one other day in history was closer to a new high and had a larger drop–a 3.7% drop on November 15, 1991. Today on the LPL Research blog we will take a closer look at whether this could signal more near-term trouble.
- Brexit breakdown. In this week’s Weekly Economic Commentary, due out later today, we discuss the direct and indirect impacts that the uncertainty from the Brexit vote in the U.K. will have on the U.S. economy and the Federal Reserve Bank (Fed). We examine our trade with the U.K. and EU, financial conditions, and business and consumer confidence as well.
- More thoughts on the Brexit implications. In this week’s Weekly Market Commentary, also due out later today, we look at the potential earnings and market implications of this historic event. Despite the political uncertainty, we are sticking with our 2016 forecast for mid-single-digit S&P 500 total returns.* As of early trading Monday morning, the S&P 500 is only down about 1% year to date, and near breakeven on a total return basis. The Brexit’s potentially limited economic and earnings impact in the U.S. is the primary reason for our optimism. Among the key risks: the likelihood that political uncertainty in Europe is likely to linger, we are in a weak seasonal period for stocks, and the U.S. election still has the potential to cause volatility.
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.
- Eurozone: Money Supply and Bank Lending (May)
- Eurozone: European Central Bank’s Forum on Central Banking Begins
- Case-Shiller Home Price Index (Apr)
- Eurozone: European Leaders Summit
- Personal Income and Spending (May)
- Yellen (Dove)
- Fed Announces Bank Stress Test Results
- Eurozone: European Leaders Summit
- Bullard (Hawk)
- Germany: Unemployment Change (June)
- Eurozone: CPI (June)
- China: Official Mfg. PMI (June)
- China: Caixin Mfg. PMI (June)
- Japan: Tankan Survey (Q2)
- Japan: CPI (May)
- ISM: Mfg. (June)
- Vehicle Sales (June)