Market Update: Friday, August 19, 2016

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  • Stocks dip as earnings season winds down, Fed in focus. U.S. markets are trading lower to begin the Friday session, as investors shift focus from corporate earnings to mixed comments on interest rate policy from key Federal Reserve Bank (Fed) members. Yesterday’s session ended with theS&P 500 up 0.2%, its first two-day win streak since August 5; energy stocks outperformed as oil continued its rise above $48/barrel. In Asia, both the Nikkei and Shanghai Composite closed the week on a slightly higher note, with the Nikkei boosted by a slight fall in the yen. European stocks are markedly lower in afternoon trading, led by Italy’s MIB, which is down 2.5%. Meanwhile, WTI crude oil is holding steady while COMEX gold is down amid dollar strength, and the yield on the 10-year Treasury continues to consolidate near 1.55%.

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  • Follow the leaders. The Conference Board Leading Economic Index (LEI), one of our Five Forecasters, rose 0.4% month over month in July, better than expected and the second straight month of acceleration. On a year-over-year basis, the index gained 0.8%, up from last month’s year-over-year increase (0.7%), and a positive data point in support of continued economic expansion over the next year-plus. Annual increases have decelerated in recent months, however, mostly due to the strong U.S. dollar, lower oil prices, and the related drop in energy capital spending. A broad assessment of the economic data suggests a pickup in activity in recent months (economic surprise indexes and inputs into third quarter gross domestic product, for example). The LEI, which we discussed in our Weekly Economic Commentary, “Follow the Leaders,” provides a valuable monthly guidepost regarding where we are in the economic expansion.
  • Oil making a run at $50. Brent crude is above $50/barrel, while WTI is within striking distance after a 22% rally off the recent August 2 low and an 8% gain just this week alone. WTI in fact is up six consecutive days for the longest winning streak since April 2015. Although we think oil can go higher over the rest of the year and beyond (as we noted in our Daily Market Update in the Q&A yesterday), one of the headwinds will be in focus today–the rig count. The Baker Hughes measure of U.S. oil rigs has risen about 20% since June, although that followed a nearly 80% decline over the prior 17 months. Increased production overseas (including from Saudi Arabia, Iran, Libya, and others) and in the U.S. in response to higher prices may slow crude’s ascent back to the $60-70 range, which we think is a likely longer-term destination for WTI.
  • Are you ready for Focus? Today on the LPL Research blog we will preview Focus 2016. Next week is our flagship conference that brings together the best and brightest in the industry to discuss the most relevant opportunities and challenges facing financial professionals today. Speakers include our CEO Mark Casady, CIO Burt White, Will Smith, and Tucker Carlson and Paul Begala–along with many more. If you can’t make the conference, don’t worry, we will be covering it on social media. Be on the lookout for the blog post later today with more information.
  • Another slow day yesterday. The S&P 500 managed to finish green for the second day in a row, adding 0.2% on light volume and a very tight range. In fact, the S&P 500 traded in a range of only 0.30%, the third tightest range day of 2016. This is nothing new though, as we noted yesterday on the blog; so far, the month of August has been historically boring. To put things into perspective, only once over the past 29 days has the S&P 500 even traded in an intraday range greater than 1%. Compare that with the first 29 days of 2016, which saw 28 days trade in a range greater than 1%.
  • Week ahead. Fed Chair Janet Yellen’s Friday speech at the Fed Jackson Hole Symposium will likely garner the most attention next week among economic events, but we also will get updates on several important data points. On Friday we’ll also receive the second estimate of second quarter gross domestic product (GDP). Housing will be in focus next week as we receive new data on housing starts and existing home sales. Other key data points include durable goods orders, consumer sentiment, and preliminary readings on August manufacturing and services sector activity, both in the U.S. and abroad. We’ll also receive import/export data for China, leading indicators for Japan, and several key data points on Germany’s economic activity. Outside of the Jackson Hole Symposium, no major central bank gatherings are scheduled.

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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.

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