Market Update: Friday, April 7, 2017


  • Stocks near flat as Syria, jobs report take center stage. (9:53am ET) U.S. markets are holding steady this morning, after the U.S. military launched missiles at a Syrian air base overnight, in a dramatic shift in policy from just a few days ago when comments suggested the Trump administration was comfortable leaving Assad in power. Also of note today, President Trump’s meeting with China President Xi Jinping, and the employment situation report which showed  payrolls rising by just 98,000 versus the 175,000 expected. Stocks yesterday closed modestly higher; the S&P 500’s 0.2% gain was led by energy (+0.8%) and financial stocks (+0.6%). In Asia, indexes ended the session near flat on little news, while European equities (STOXX Europe 600 -0.1%) are mostly lower late in the afternoon session amid a flurry of mixed economic data. Meanwhile, WTI crude oil (+0.8%) continues to rise, now hovering near $52/barrel, COMEX gold is spiking more than 1% in the flight to safety, and the yield on the 10-year Treasury has broken down to its lowest level since November, at 2.29%.


  • U.S. military strikes in Syria. First, the details of the chemical weapons attacks in Syria are horrific and we are saddened by the many lost lives in that country’s ongoing civil war. It is always uncomfortable to talk about stock market impact during humanitarian crises, but it’s our job and we do it as best we can. The U.S. response to the use of chemical weapons-a series of missile strikes on a Syrian military base where the chemical weapons reportedly originated-initially had U.S. markets unsettled; Dow futures fell 100 points overnight. But as more domestic traders digested the news and got involved in futures markets, those losses were erased and futures (S&P and Dow) were poised to open little changed as of about an hour ahead of the market open. We don’t know whether this situation remains contained, but looking back at previous military conflicts in recent decades, in general, the stock market has shrugged them off and either risen or pulled back modestly, recouping losses within days or weeks. Conflicts that have seen larger declines, such as Iraq’s invasion of Kuwait in 1990, occurred during a period of economic weakness and had more economic impact.
  • Defense stocks, oil and gold getting a lift. Fears that the Syrian conflict will lead to more defense spending lifted defense stocks overnight. Oil is also getting a boost as markets price in a higher probability of supply disruptions in the Middle East (we do not expect Russian oil production to be impacted by this conflict). Even in the absence of last night’s news, we are constructive on industrials, including defense, and have a positive bias toward oil and energy, while continuing to favor master limited partnerships (MLP). Finally, gold is seeing some safe-haven demand and may provide some cushion for portfolios should the conflict broaden.
  • Jobs number disappoints but unemployment falls. The U.S. economy created 98,000 jobs in March, decelerating from February’s downwardly revised 219,000 and missing consensus expectations of 175,000 jobs created by a wide margin. At the same time, the unemployment rate was a positive surprise, falling from 4.7% to 4.5%. Wage growth disappointed slightly at +0.2% month-over-month growth, offset by an upward revision to February, and stands at a healthy 2.7% year over year. While weather may have played a role in weaker-than-expected job creation, slowing job growth is normal at this point in the cycle. Job creation would need to slow to a sustained 25,000-50,000 per month to signal that a recession may be imminent. The report likely keeps the Federal Reserve (Fed) on track to raise rates two more times in 2017, although the slowdown in job creation and lack of acceleration in wages will likely reduce any speculation that they would move more quickly.
  • Margin debt makes another new high. New York Stock Exchange (NYSE) margin debt is back in the news, as it made another all-time high in February at $528 billion. Many say this is a contrarian indicator, as it shows investors are potentially over-leveraged. So is record margin debt really a warning sign for equities? For starters, it appears to be more of a coincident indicator than a leading indicator, as margin debt made an all-time high in April 2013 and it has moved higher with the S&P 500 the past four years. In fact, the S&P 500 has gained approximately 70% since margin debt started making new highs. Today on the LPL Research blog we will take a closer look at this development.


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