Market Update: Monday, August 15, 2016

MarketUpdate_header

  • U.S. stocks rise on China rally, continued oil strength. The major averages are moving higher in early trading, boosted by continued speculation of a new stimulus package from China’s central bank and sustained strength in the oil patch following its more than 6% rise last week. Friday’s session ended similar to the entire week, with stocks finishing mixed and with little change; materials were the outlier, as they fell more than 1%. Overnight in Asia, the Shanghai Composite jumped 2.4% to a seven-month high, while the Nikkei fell 0.3% following a disappointing gross domestic product (GDP) report. In afternoon trading, European shares are being led higher by pharmaceutical stocks. WTI crude oil is higher again near $44.80/barrel, and COMEX gold is flat at $1,344. Finally, the U.S. Dollar Index is down slightly, and Treasuries are holding on to strong gains from Friday as the yield on the 10-year note sits at 1.52%.

MacroView_header

  • Earnings recession continues. The second quarter 2016 earnings season will see another decline–its fourth straight based on Thomson data (or fifth based on FactSet). With 458 S&P 500 companies having reported results, earnings are tracking to a 2.5% year-over-year decline, 2% better than estimates as of July 1, as 70% of companies have exceeded estimates. Excluding energy, S&P 500 earnings rose 1.3%. We tentatively expect the earnings recession to end in the third quarter, but it will be the fourth quarter before corporate America delivers any material earnings gains.

080816_EarningsDashboard-01

  • Another bright spot for the earnings story. The bright spots this earnings season have been technology, which has delivered the most upside to prior estimates (+6.7%), and the resilience of forward estimates, which are down less than average, by 1%, since July 1. But consumer discretionary, a late reporter, has also made a surge, with help from retailers’ reports last week. The sector is now tracking to a more than 4% upside surprise versus prior estimates and a market-leading 13.3% year-over-year earnings gain.
  • A look at international earnings. For all the discussion on macroeconomics and politics, especially given all the machinations from the fallout of the Brexit vote, earnings are still what drive financial markets. Earnings have declined in all regions; if the U.S. is in an earnings recession, one could argue that overseas there is an earnings depression. However, although analysts have reduced expectations for future earnings, overall expectations for growth in 2017 are still solid and supportive of the markets going forward. In this week’s Weekly Market Commentary, due out later today, we look at earnings, and the changes in earnings expectations in Europe and Japan.
  • Should you have a fear of new highs? Last Thursday, the Dow, S&P 500, and Nasdaq all made new all-time highs on the same day for the first time since December 31, 1999. This event has drawn a good amount of media excitement over the weekend, as that last occurrence also marked the peak of the tech bubble, and the start of a recession and bear market. The big question is: how worrisome is this event? Going back to 1980, there have been 148 other times all three major indexes made a new all-time high and the near-term results do show some underperformance. Yet, going out a year, the median return jumps up to 17.2%, well above the at-any-time median return of 11.1%. Today on the LPL Research blog we will take a closer look at this development.
  • The tight range continues. Last week the S&P 500 traded in a range (high to low) of 0.76%, the smallest weekly range since May 2015 had 0.69%. The small daily ranges continued as well, as the S&P 500 fell less than 0.1% on Friday. Incredibly, 19 of the past 21 days have now closed up or down less than 0.5%. That hasn’t happened since September 1995. Additionally, over the past month (21 trading days) the S&P 500 has traded in a range (high to low) of 1.90%. There was a 1.75% range ending September 2014, but you have to go back to August 1995 for the time before that.
  • Week ahead. The minutes of the July Federal Open Market Committee (FOMC) meeting, the July Consumer Price Index (CPI), housing and leading indicators data, and August reports on manufacturing and homebuilder sentiment highlight the week’s busy U.S. economic data calendar. In addition, there are several key Federal Reserve Bank (Fed) officials on the docket this week, including New York Fed President Bill Dudley. Overseas, the German ZEW Index for August highlights an otherwise quiet week in Europe. There are no major central bank meetings this week, although Indonesia’s central bank is expected to cut rates at its meeting later in the week. See our Weekly Global Economic & Policy Calendar for more details.
  • Business capital spending. In this week’s Weekly Economic Commentary, due out later today, we’ll take a look at the slow pace of business capital spending in the current economic recovery, relative to other recoveries, and the implications for future economic growth.
  • Japanese GDP slows. The Japanese economy was flat for the second quarter, compared to a 0.2% expected growth rate. On an annualized basis, growth was 0.2% versus the 0.7% expected growth rate. The economy was hurt by a contraction in business spending and a significant decline in exports due to the rising Japanese yen. This data put further pressure on the Bank of Japan for a more aggressive expansion in monetary policy, even though the effectiveness of this policy is under review. The markets did not move much on this news, with the yen appreciating slightly and a modest decline in Japanese stocks.

MonitoringWeek_header 

Monday

Tuesday

  • Housing Starts and Building Permits (Jul)
  • CPI (Jul)
  • Germany: ZEW (Aug)

Wednesday

  • FOMC Minutes
  • Bullard (Hawk)
  • China: Property Prices (Jul)

Thursday

Friday

  • Indonesia: Central Bank Meeting (Rate Cut Expected)

 

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.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking # 1-525912