Market Update: Tuesday, November 1, 2016

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  • U.S. equities lower as Fed policy meeting kicks off. Major indexes are modestly lower in early trading as the Federal Reserve Bank begins its two-day policy meeting. Though no rate hike is expected with the presidential election looming, investors will be closely monitoring the Fed’s messaging for signs of its likely intentions at the December meeting. Overseas, stocks in Asia closed mixed as the Nikkei posted a modest gain (0.1%) after the Bank of Japan opted for the status quo at its most recent monetary policy meeting; the Shanghai Composite (0.7%) and Hang Seng (0.9%) also gained on upbeat manufacturing data out of China, while stocks in India and Korea slipped. European markets turned lower in afternoon trading, poised for a seventh straight decline, with traders focused on mixed corporate earnings amid a lack of economic data. Elsewhere, WTI crude oil ($46.88/barrel) is flat after yesterday’s 3.9% slide, COMEX gold ($1287/oz.) is up 1.1%, and the yield on the 10-year Treasury note is up 4 basis points to 1.86%.

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  • Treasury yields move higher. A string of positive economic reports last week helped push yields higher, with the 10-year Treasury yield jumping 11 basis points to end the week at 1.85%, its highest level since late May. Longer-dated Treasuries saw more price weakness (and a corresponding larger climb in yields) than short-term Treasuries, leading to a steepening of the yield curve. An increase in growth expectations drove most of the increase in Treasury yields for the week, in contrast to the past few weeks where rising inflation expectations have been the main driver. All these signs point to a bond market signaling that the economy may be ready for an interest rate hike. We dive into this topic in this week’s Bond Market Perspectives, due out later today.
  • Tough week for fixed income. Rising rates mean lower prices for fixed income sectors, with longer duration areas such as government bonds (U.S. Treasuries and foreign bonds) and investment grade corporates seeing the most weakness. Bank loans were the only fixed income sector that managed a gain as the Barclays US High Yield Loan Index returned 0.06% for the week, though municipals and mortgage backed securities were among the sectors that lost the least.
  • High yield takes a step back. The high-yield market has benefited from stabilizing oil prices recently, with spreads compressing as markets began to price in the possibility that the worst of oil defaults are behind us. The trend took a break last week, with spreads widening for the first time in six weeks, as oil reversed course and ended the week just below $50 on renewed skepticism of an OPEC production cut. Taken in context, the spread widening of 0.10% was minor compared to the 1.31% in compression that had taken place over the previous six weeks, and we continue to believe that the current valuations of high-yield bonds leave little room for error in economic and default forecasts.
  • Municipal supply falls from recent highs. Supply in the municipal bond market, which has been near multi-year highs in recent weeks looks to be finally taking a breather. The Bond Buyer 30 Day Visible Supply fell from more than $21 billion last week, to just $13 billion as of Friday. Even after the large drop, supply remains above average ($9 billion) as it has for much of the year. Demand from investors has been able to offset the supply surge so far this year, and muni fund flows moved positive again last week according to Lipper data, after breaking a 54-week streak of consecutive inflows with a small outflow the week before.
  • China continues to stabilize. Chinese economic data came in better than expected. Both the official and private sector manufacturing PMI came in at 51.2, better than both previously months and expectations. Non-manufacturing PMI release was 54, representing a positive trajectory. Better economic data give the Chinese government more leeway in dealing with important structural issues like its bad debt problem. Asian markets responded positively to this news.
  • Down five in a row. The S&P 500 finished lower by only 0.01% yesterday, but was still down for the fifth consecutive day. This is the first five-day losing streak since June and third this year. What stands out about the past five days though is how small the losses have been. In fact, the past five days the S&P 500 is down only 1.17%. You have to go back to June ’96 the last time the S&P 500 had a less than -1.17% five-day losing streak (-1.06%). There have been 62 total five day losing streaks over this time.
  • Goodbye October. The S&P 500 lost 1.9% for the third consecutive down month, which comes on the heels of a five-month win streak. You have to go back to 1975 and 1941 to find the most recent times that occurred. It was a very calm month, as the S&P 500 traded in a range of only 2.60%, which was the 7th tightest range for a month going back to 1970. Over the past three months the S&P 500 has dropped only 2.2% even though it was lower all three months. A 1.9% three-month drop in late ’84 is the last time there was a stronger three-month losing streak. Looking at the sector breakdown, financials and utilities were the only groups to sport a gain on a total return basis, while healthcare and real estate were the two big losers.
  • The best six months of the year. Now that October has ended, equities begin the historically bullish timeframe of November to April. From 1950 to 2015, the S&P 500* has gained 1.4% on average during the May to October timeframe, while gaining 7.1% from November to April. We will look into this phenomenon much more over the coming days, but today on the LPL Research blog, we will take a closer look at sector seasonality as it pertains to November.

*Any data prior to March 4, 1957 is back-tested, as published by the index’s parent company, S&P DOW Jones Indices. All information for an index prior to its Launch Date is back-tested, based on the methodology that was in effect on the Launch Date. Back-tested performance, which is hypothetical and not actual performance, is subject to inherent limitations because it reflects application of an Index methodology and selection of index constituents in hindsight. No theoretical approach can take into account all of the factors in the markets in general and the impact of decisions that might have been made during the actual operation of an index. Actual returns may differ from, and be lower than, back-tested returns.

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Tuesday

  • ISM Mfg. (Oct)
  • Vehicle Sales
  • Japan: Bank of Japan Meeting (No Change Expected)

Wednesday

Thursday

  • ISM Non-Mfg. (Oct)
  • UK: Bank of England Meeting (No Change Expected)

Friday

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.

A money market investment is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although money markets have traditionally sought to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.

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) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

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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