Market Update: Monday, November 14, 2016

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  • Stocks near flat as bond yields continue to rise. U.S. markets are little changed in early trading, though the bond market continues to make waves as the yield on the 10-year Note (2.25%) is up another 10 basis points from Friday’s close. Last week saw the S&P 500 post its largest weekly gain in more than two years (+3.8%) with the heavily-weighted financial sector leading the way, up 11.4%; rate-sensitive utilities, consumer staples, telecom, and real estate all closed lower on the week. Asian markets were mixed overnight; Japan’s Nikkei (+1.7%) climbed following a better than expected Q3 gross domestic product (GDP) release, while the Hang Seng lost 1.4%. European markets are mostly higher in the afternoon session, though they have pulled back from earlier levels alongside a drop in oil, which is down 1.2% to $42.90/barrel as supply concerns weigh on the price. Finally, COMEX gold ($1211/oz.) continues to sell off and the dollar index (+1.0%) has carried over last week’s momentum, approaching two-year highs.

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  • Earnings recession ending with a bang. Corporate America is delivering a strong end to earnings recession, with the S&P 500 tracking to a 4.1% year-over-year earnings increase (approximately 7.4% excluding the energy sector). The 71% beat rate has led to a roughly 5% upside surprise to prior (October 1, 2016) estimates. S&P 500 earnings estimates for the next four quarters, which dipped just 0.1% over the past week, have continued to hold up well during earnings season, losing slightly more than 1%. Look for more from us on earnings in the upcoming weeks in our Corporate Beige Book and Outlook 2017.
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  • What a week. Last week was historic on many levels. Among the highlights: the S&P 500 gained 3.8% for its best week since October 2014, the Dow gained 5.4% for its best week since December 2011, bonds were hit very hard as the 10-year yield spiked 21% (the most ever, using reliable data going back 50 years), the CBOE Volatility Index (VIX) had its third-largest weekly drop ever (down 37%), biotech had its best week in seven years, small caps gained more than 10%, microcaps did even better by adding 12%, and financials tacked on 11% – their best week since May 2009. We are not surprised that stocks recovered from the initial post-election selloff; but rather how swiftly. There were several factors behind the sharp turnaround, including the certainty of the outcome, optimism regarding a peaceful transition, anticipation of market-friendly policies, and negative investor sentiment heading into the election. Today on the LPL Research blog we will take a closer look at all of these events and a few more, while in today’s Weekly Market Commentary we discuss the election outcome and the market’s reaction.
  • Post-election standouts include financials, healthcare and industrials. Also discussed in today’s market commentary, the outlooks for financials, healthcare, and industrials appear to have brightened meaningfully and energy and small caps may get a boost. The near-term may continue to be volatile for emerging markets, though we maintain our positive intermediate-to-long-term view on that asset class amid attractive valuations, earnings stabilization, and expected moderation of Trump’s views on foreign trade. Look for more on potential election impacts in our Outlook 2017, due out later this month.
  • Japanese GDP upside surprise. Japanese Q3 economic growth was much higher than expected, increasing 2.2% on an annualized basis, compared to expectations of a 0.8% increase. Trade was the surprising variable, with exports higher and imports lower than expected. While this is good news for the economy overall, data from key sectors like business and consumer spending were largely consistent with expectations. That data, combined with measures of inflation also released, suggest that internal Japanese demand remains relatively weak, despite the better GDP headline.
  • Chinese economic data was slightly weaker than expected, and flat over previous releases. China released industrial production and retail sales overnight. Industrial production grew at 6.1% year over year, slightly less than the 6.2% increase expected. Consumer spending increased 10% year over year, a good gain on an absolute basis, but still below the 10.7% expected. Overall, the data from China continue to show stabilization in the economy, but there is much work to do as the government attempts to guide the economy from an industrial and export orientation toward a more consumer-oriented consumer economy.
  • Key data on inflation, housing, manufacturing, and the consumer along with Fed Chair Yellen in the week ahead.  Late last week, Federal Reserve Bank (Fed) Chair Janet Yellen added a last minute appearance before the Joint Economic Committee of Congress for November 17, and that appearance is the key to this week’s calendar. Data on inflation, housing, manufacturing, and consumer spending will also draw plenty of attention. In addition to Yellen, there are more than a dozen other Fed speakers on the docket this week, presumably preparing markets for a December rate hike. Overseas, key data on GDP (Japan) and industrial production and retail sales (China) were released over the weekend, while later in the week a key speech from European Central Bank (ECB) President Draghi and data on GDP (Eurozone), ZEW (Germany) and CPI (UK) are on tap.

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Monday

  • Kaplan (Hawk)
  • Lacker (Hawk)

Tuesday

Wednesday

Thursday

  • Housing Starts and Building Permits (Oct)
  • Yellen (Dove)
  • Mexico: Central Bank Meeting (Rate hike expected)
  • China: Property Prices (Oct)

Friday

  • Leading Indicators (Oct)
  • George (Hawk)
  • ECB’s Draghio speaks in Frankfurt
  • APEC Leaders Summit in Peru

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.

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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.

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High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

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