Market Update: Wednesday, May 17, 2017


Yesterday’s Market Activity

  • U.S. stocks showed little concern Tuesday over escalating drama in Washington, D.C.; S&P 500 closed unchanged. Reports that President Trump asked former FBI Director James Comey to shut down investigation into national security advisor Michael Flynn’s Russia dealings increased concerns about Trump policy agenda but little market impact thus far.
  • Technology (+0.6%) led all S&P sectors, particular strength in semiconductors; financials (0.2%) the only other sector with gains. Tech still relatively attractively valued but forward price-to-earnings level at multi-year highs vs S&P 500 (6% premium).
  • International equities outperformed; euro rallied as Eurozone gross domestic product (GDP) rose 0.5% quarter over quarter, as expected. Euro weakness fueled strong dollar-based returns for U.S. investors in Europe.
  • 10-year Treasury yield slipped 0.02% yesterday; all major bond sectors produced slight gains except Treasury Inflation-Protected Securities (TIPS), which were flat.
  • Economic data was mixed, including weaker-than-expected housing starts and housing permits (some weather-related distortions likely at play); broad-based strength in industrial production (mining, manufacturing and utilities), 1.0% month over month. The ratio of beats to misses in terms of economic data has fallen over the past month.

Overnight & This Morning

  • The S&P 500 is down ~0.8% early on escalating concerns over Trump agenda.
  • Key international markets are lower; Japan’s Nikkei slipped 0.5% while Europe’s STOXX 600 is about 0.3% lower in midday trading overseas.
  • VIX (implied stock market volatility) up sharply this morning but remains extremely low by historical standards. We don’t view low VIX as a reason to expect market selloff but stocks due for a pullback and a 5% drawdown would not be surprising.
  • WTI crude oil (+0.6% to $49.02/bbl.) up slightly overnight, even after private industry data showed inventory build.
  • Treasury yields down slightly near 2.29%, COMEX gold advancing (+0.8% to $1,254/oz.) amid safe haven buying.
  • Today’s economic calendar includes mortgage applications, government weekly crude inventories.


Key Insights

  • Push and pull between policy and market fundamentals continues. Concerns escalating that Trump agenda may be in danger, increasing importance of market fundamentals to support major indexes at or near all-time highs. Fundamentals and optimism around Trump’s policy agenda have been winning thus far (S&P 500 year-to-date return 8.1%), but this morning’s losses based on increased concerns about achieving corporate tax reform and other parts of the Trump agenda ahead of campaign season for 2018 mid-term elections.
  • Diversification starting to work. The environment for active management continues to improve, especially in equities, with falling intra-market correlations, and better international performance. Recent flow data favored active strategies over passive, a rare occurrence in recent years.

*Active management involves risk as it attempts to outperform a benchmark index by predicting market activity, and assumes considerable risk should managers incorrectly anticipate changing conditions.

Macro Notes

  • What to do with a record low VIX. The Volatility Index (VIX) closed at 9.77 on May 8, its lowest close since 1993. So far this year, equity volatility has been near historically low levels – surprising many amid the geopolitical drama. Today on the LPL Research blog we will take a look at what happens after low VIX levels and show why it usually isn’t a bearish event.




Click Here for our detailed Weekly Economic Calendar


  • Russia: GDP (Q1)
  • Japan: GDP (Q1)



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) 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.

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