Market Update: Monday, July 25, 2016

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  • Markets dip ahead of central bank meetings and economic data. U.S. markets are trading modestly lower this morning, as investors wait for central bank announcements, along with housing and gross domestic product (GDP) data later this week. Although no change is expected from the Federal Reserve Bank (Fed), markets anticipate additional monetary stimulus from the Bank of Japan (BOJ). The S&P 500 closed at a new all-time high on Friday (2175.03), as last week’s corporate earnings reports came in a little better than expected; all 10 sectors rose, paced by a 1.3% gain in both telecom and utilities. Asian markets finished close to flat to start the week, with the Nikkei slipping into the red at the end of the session, while the Shanghai Composite gained 0.1%. In Europe, stocks are mostly higher, led by Germany’s DAX after reports that its business climate remained stronger than expected following the Brexit vote. WTI crude oil continues to retreat from its highs in early June, now below $43.50/barrel, while COMEX gold is down over half a percent, and Treasuries are mixed with the yield on the 10-year Note at 1.55%.

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  • Solid week of earnings relative to expectations. With 125 S&P 500 companies having reported second quarter 2016 results thus far, S&P 500 earnings are tracking to a 3.0% year-over-year decline, about 1% ahead of July 1 estimates (based on Thomson Reuters data). Excluding the energy sector, that figure rises to +0.7%. Tech and industrials have beaten earnings expectations by the widest margin thus far, while second quarter estimates for financials have fallen during earnings season. This week brings an earnings barrage with 194 S&P 500 companies slated to report.

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  • Earnings estimates inch lower. The easing pressures from the U.S. dollar and oil prices, along with a pickup in economic growth (based on consensus estimates for second quarter GDP), have enabled corporate America to largely maintain forward estimates during the first two weeks of earnings season. Estimates for the second half of the year have fallen by 0.7% since July 1, slightly better than the recent quarterly trend. Energy and materials estimates have risen while industrials and financials are down the most.
  • Another higher week for the S&P 500. The S&P 500 managed to squeak out a positive week last week, gaining 0.6%, with technology and healthcare leading the charge, while energy and telecom lagged. Healthcare got a nice bounce thanks to biotech having a great week. The S&P 500 hasn’t dropped for the week since the week after the Brexit vote, and is now up for 4 straight weeks. Interestingly, the past 5 times the S&P 500 has been up 4 straight weeks, it has been higher the following week, as well as during 9 of the past 11 times (going back to January 2012).
  • Is the S&P 500 breaking out of a historically tight range? The S&P 500 closed at yet another new all-time high on Friday for the seventh all-time high this month, the most for any month since November 2014 had 12 new all-time highs. What is interesting about this move, though, is that during the previous 24 months (ending June 2016) the S&P 500 traded in a range of less than 18%. That was one of the tightest two-year ranges ever. Other periods that traded in a tight range for two years (like now) were in 1985, the mid-1990s, and 2005-06. Today on the LPL Research blog we will take a closer at this phenomenon and what it could mean for future returns.
  • Week ahead. In the U.S., the Federal Open Market Committee (FOMC) meeting, Q2 GDP, and a slew of housing data and post-Brexit data on manufacturing highlight the week’s calendar. The peak week for Q2 earnings and the Democratic National Convention are also on the docket this week. Overseas, the Bank of Japan meeting and Q2 GDP reports in the U.K. and Eurozone will draw the most attention, and the Chinese Purchasing Managers’ Index (PMI) data for July are due out over the weekend of July 30-31. View our Weekly Global Economic and Policy Calendar.
  • Big week coming up overseas. This could be a meaningful week overseas. In addition to earnings season beginning in earnest, there are two potential market moving events. The European Central Bank will release its “stress test” of banks on Friday. Many European banks, notably several from Italy, are widely believed to be undercapitalized. Also on Friday, the BOJ will meet, with very uncertain expectations regarding changes in monetary policy. However, as there is a pending announcement of major Japanese fiscal stimulus, the BOJ may be on hold.
  • A look at some under the radar breakouts in this week’s Weekly Market Commentary. Following the recent breakouts to new highs for the S&P 500, Dow Jones Industrials, and other major indexes, in this week’s commentary (due out later today) we look at some other interesting, under-the-radar breakouts in the economy and markets.
  • What is the LEI suggesting? In this week’s Weekly Economic Commentary, due out later today, we take a look at the Conference Board Leading Economic Index (LEI), one of our Five Forecasters, which provides a valuable monthly guidepost regarding where we are in the economic expansion. Looking at LEI readings past and present, as well as other contributing factors influencing U.S. economic growth, we believe the LEI is currently signaling low odds of a recession in the next couple of years.

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Monday

Tuesday

  • Richmond Fed Mfg. Index (Jul)

Wednesday

  • FOMC Decision
  • UK: GDP (Q2)
  • Eurozone: Money Supply and Bank Lending (Jun)

Thursday

  • Initial Claims (7/23)
  • Germany: Unemployment Change (Jul)
  • Germany: CPI (Jul)
  • Japan: Jobless Rate (Jun)
  • Japan: CPI (Jun)
  • Japan: Tokyo CPI (Jul)
  • Japan: Industrial Production (Jun)
  • Japan: Retail Sales (Jun)

Friday

  • GDP (Q2 and Revisions to Data from 2013 – 2016)
  • Chicago Area PMI (Jul)
  • Eurozone: GDP (Q2)
  • UK: Money Supply and Bank Lending (Jun)
  • Eurozone: CPI (Jul)
  • Japan: Bank of Japan Meeting
  • Mexico: GDP (Q2)

Sunday

  • China: Official Mfg. PMI (Jul)
  • China: Official Non-Mfg. PMI (Jul)
  • China: Caixin Mfg. PMI (Jul)

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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