Market Update: Thursday, June 30, 2016

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  • Rally sputters as equities, oil fall. U.S. equities are largely unchanged to start the final day of the quarter as traders continue to focus on uncertainty around Brexit, while WTI crude oil pulls back from a two-day surge. The pause in equity markets comes after a second day of gains in the U.S. and Europe that saw the S&P 500 rise 1.7%; all 10 sectors finished green, led by a 2% jump in financials and energy. European markets have shown little movement in either direction during midday trading, and the Nikkei Index and Shanghai Composite both closed flat. Elsewhere, COMEX gold is down modestly and the yield on 10-year Treasuries is hovering around 1.50%.

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  • Brexit update. Boris Johnson, the former Mayor of London and leader of the “leave” campaign has removed himself from consideration as the next leader of the U.K.’s ruling Conservative Party, who would become Prime Minister (PM) once current PM David Cameron leaves by early September. Others who have announced plans to seek the job include reluctant “remain” supporter Teresa May, “remain” supporter Stephen Crabb, and “leave” supporters Michael Gove and Liam Fox. May and Gove are currently the favorites to take the job, with Gove lining up to the hard-line Brexiter and May taking a somewhat softer approach. The rebound in financial markets over the past several days after the post Brexit sell-off on Friday June 24 and Monday June 27 suggest that most market participants now expect “Brexit Light” (the U.K. retains trade relationships with the EU but restricts immigration)  to occur, or for the U.K. to remain in the EU even though the vote was to leave.
  • New claims for unemployment rose 10,000 to 268,000 in the week ending June 25, as claims stabilize near 40-year lows after recent distortions. More distortions loom, however, as the end of the school year and the annual auto plant shutdowns are on the horizon. Claims are down 17,000 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 a recession, so clearly there is no recession signal from claims. The level of claims continues to point to a solid labor market, but we will continue to watch it closely.
  • Wave of dividends and share repurchases follows successful bank stress tests. All 31 U.S. banks that were reviewed under round two of the Federal Reserve Bank’s (Fed) bank stress tests (known as the Capital Analysis & Review, or CCAR) received passing grades last night, although approval for one (Morgan Stanley) was conditional upon submitting a revised capital plan and two U.S. subsidiaries of European banks failed the test. The overall net payout (dividends plus share repurchases relative to earnings) for this group will increase 11% overall, a solid result generally above analysts’ expectations. These results should help provide much needed support for the financials sector struggling with low interest rates. Financials are the worst S&P 500 sector performer of 2016 with a 4.5% loss year to date, compared with the S&P 500’s +2.5% total return.
  • Another big bounce. The S&P 500 gained another 1.7% yesterday, on the heels of gaining 1.8% the day before. This was the best two-day bounce since the February lows; of course, it came on the heels of the worst two-day drop since last August. That streak eventually made it to six in a row. Also, the past four days have all moved at least 1.5%, for the first time since November 2011. With one day to go in the quarter, the S&P 500 is up 0.5% in the second quarter. This could be the third straight quarterly gain.
  • Beware the last day of the month. Today is the final trading session in June. It is worth noting that the final trading day of the month has been historically weak recently. In fact, the last trading day of the month was up only twice all of last year, the lowest since 1932. Turning to this year, it has been higher only once and that was in January. Lastly, going back to 1980, the last day of June has been higher only 41.7% of the time, the lowest for any month. Today on the LPL Research blog we will take a closer look at what this could mean.

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Thursday

  • 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)

Friday

  • ISM: Mfg. (June)
  • Vehicle Sales (June)

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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