Market Update: Wednesday, February 1, 2017

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  • Global markets up on earnings, ahead of Fed. (10:30am ET) U.S. indices are higher this morning, encouraged in part by better-than-expected results from tech giant Apple, an ADP employment report that came in well above consensus expectations, and a continuation of strong buying seen at the end of yesterday’s session. Traders will also be eyeing the Federal Reserve Bank (Fed) as it wraps up its first meeting of the year this afternoon; no change is expected in interest rates. The S&P 500 finished marginally lower Tuesday (-0.1%), while the Nasdaq closed flat and the Dow lagged (-0.5%).  Healthcare (+1.4%) and utilities (+1.6%) saw notable strength while financials (-0.7%) underperformed. Overseas, traders are evaluating a slew of Purchasing Managers’ Index (PMI) reports. The Nikkei rebounded from early weakness to notch a 0.6% gain while many exchanges across Europe are up near 1%, boosted by upbeat corporate earnings. Elsewhere, WTI crude oil ($53.15/barrel) is up 0.7%, COMEX gold ($1201/oz.) is down 0.9%, and weakness in Treasuries has pushed the yield on the 10-year note higher to 2.51%.

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  • FOMC statement to be released at 2:00 PM ET today. The Fed concludes its first of eight FOMC meetings of 2017 today. The fed funds futures market is not pricing in a rate hike today. There is no press conference by Fed Chair Janet Yellen, nor is there a new set of economic forecasts or dot plots at this week’s meeting, only a statement. Fiscal policy is unlikely to get a mention. Please see this week’s Weekly Economic Commentary for details.
  • Under new methodology, ADP employment report continues to suggest tightening labor market. Until recently, ADP, the nation’s largest payroll processing firm, used only its database of payroll data to make its estimate of private sector employment each month. A few years ago, ADP started adding other, publicly available data on employment to supplement its forecast. Effective as of the October 2016 report, ADP added oil prices, initial claims, consumer sentiment, and the Conference Board Leading Economic Index (LEI), so there is very little “new information” about the labor market in the ADP report. The January 2017 report found that  the private sector economy created 246,000 new private sector jobs, 78,000 more than expected by the consensus of economists as polled by Bloomberg (+168,000). The December 2016 reading on ADP was essentially unrevised at +151,000.  The ADP report, once a key input for making forecasts of the U.S. Bureau of Labor Statistics‘ jobs report, has faded recently as a forecasting tool, as it no longer relies on only its own, proprietary information. The U.S. Department of Labor will release the Employment Situation report on Friday, February 3. The consensus expectation is a job gain of 175,000 and an unemployment rate of 4.7%.
  • Purchasing Managers Across the Globe. PMI data has come in across the globe, more or less as expected in most countries. Numbers across Europe were generally strong with Eurozone PMI at 55.2, ahead of both expectations and the previous month. In China, the PMI numbers have stayed above 50 as non-manufacturing PMI increased to 54.6. The global economy continues to expand with almost all countries participating. The one major exception is South Korea, where PMI fell to 49 from 49.4. In addition, South Korean industrial production declined 0.5% in December, worse than both expectations and November data.
  • January is over and it was historically slow. The S&P 500 gained 1.8% last month, to extend the monthly winning streak to three in a row. Going back to 2012, the previous six times the S&P 500 was up three months in a row, it was up the following month. What was unique about last month was the lack of volatility. In fact, the S&P 500 traded in a monthly range (including intra-day data) of only 2.5%, which was the smallest range ever for January and puts it in the bottom 1.2% for all monthly ranges (data since 1970).  Lastly, the S&P 500 hasn’t closed down 1% for three consecutive calendar months for the first time since 2006 and this was the first January since 2013 that didn’t see a 1% drop. The S&P closed at least 1% lower a record nine times in January 2016… what a difference a year makes!
  • As goes January, so goes the year? Now that January is in the books, does it tell us anything about the rest of the year? A well-known trading axiom is the January barometer and it says ‘as goes January, so goes the year.’ In other words, if the S&P 500 is higher in January, then the rest of the year will be higher and vice versa if the first month is lower. Diving into the data, there does appear to be some truth to this, as the previous 40 times the S&P 500[1] was green in January (since 1950), the rest of the year was higher 88% of the time with an average return of 12.1%. What if January is lower? Then the rest of the year has been up only 1.2% on average and higher only 59% of the time. It is worth noting that each of the previous three years January finished lower and all three years rallied the final 11 months. Still, when January is higher (like 2017), the data would suggest potentially higher equity prices the remaining 11 months of the year. Today on the LPL Research blog we will take a closer look at the January barometer.
    [1] Please note: The modern design of the S&P 500 stock index was first launched in 1957. Performance back to 1950 incorporates the performance of predecessor index, the S&P 90.

 

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Click Here for our detailed Weekly Economic Calendar

Wednesday

  • ADP Employment (Jan)
  • ISM Mfg. (Jan)
  • Vehicle Sales (Jan)
  • FOMC Statement
  • UK Parliament Expected to Vote on Authorizing Article 50 (Brexit)
  • India: 2017-18 Budget Speech

Thursday

  • UK: Bank of England Meeting (No Change Expected)
  • China: Caixin Mfg. PMI (Jan)

Friday

  • Employment Report (Jan)
  • ISM Non-Mfg. (Jan)
  • Evans* (Dove)
  • EU Leaders Meet in Malta

 

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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