Yesterday’s Market Activity
- Stocks fell, bonds rallied as markets digested Fed, ECB minutes which highlighted concern over weak U.S. inflation, strong Euro. Dow (-1.24%) ended four day winning streak, S&P 500 Index -1.54%, NASDAQ -1.94%. Market weakness exacerbated as political issues persisted with disbanding of two CEO Advisory boards by the President.
- Treasuries strengthened as risk-off assets rallied with 10-year yield -0.04% to 2.19%. 30-year Treasury yield fell 3 basis points (0.03%) to 2.77%.
- U.S. Dollar Index +0.14% after Fed minutes. Euro weakness after ECB commented on concerns that the Euro would overshoot led the dollar higher.
- Commodities – Precious metals rose amid flight to quality (COMEX gold +0.7%); copper fell, WTI crude oil (+0.7% to $47.09/bbl.) rose.
Overnight & This Morning
- Asian markets mostly lower following U.S. weakness on Thursday. Nikkei (-1.2%), Hang Seng (-1.1%); Shanghai Composite was flat.
- European stocks slipping after multiple terrorist attacks in Barcelona yesterday and overnight. STOXX Europe 600 -0.8%.
- Crude oil ($47.20/bbl.) slightly higher after falling three of the previous four sessions.
- Metals broadly higher, led by gold (+0.8%), which is back over $1300/oz.
- U.S. stocks little changed to begin trading, 10-year Treasury yield at 2.18%.
- Politics and central banks weighed heavily on equity markets yesterday. Political issues, the Federal Reserve (Fed), the European Central Bank (ECB), and terrorist attacks in Barcelona all combined to lead risk assets lower. Additionally, rumors that a presidential advisor might not stay on with the administration-though the allegations were denied by the White House-led to speculation that the economic agenda might be in jeopardy. It is important to remember that one day does not make or break a market.
- Maintain a positive view of MLPs. Master limited partnerships (MLP) have significantly underperformed the equity market this year, trading generally in line with oil prices. However, the most important thing for them fundamentally is oil (and natural gas) production, more-so than prices, since their revenues are primarily based on volume transported. MLPs also have some correlation to bonds, but the bond market should be supportive of MLPs. As we noted in a previous Weekly Market Commentary, the pricing and market action of MLPs can be complicated. The market took an additional hit last week when one of the larger MLPs cut distributions, however, there have been very few distribution cuts this year. But when a major company does cut distributions, it influences the whole sector. However, our fundamental outlook remains strong; deregulation is happening, we don’t think rates rise very quickly, we think oil prices are below fair value, and yields provide a cushion. We would be careful not to get too heavy in commodity stocks but we believe a small direct allocation to MLPs can be appropriate for suitable investors.
- Tough stance but we’re sticking with it. Relying on Republican unity to achieve tax reform and strike an 11th hour deal to raise the debt limit next month is a tough stance to defend. However, we continue to believe that the desire for a “win” among Republicans, the level of agreement on the primary tax issues, and the strength of leadership on the issue (solidified by the news that Gary Cohn plans to remain in his post) still suggests to us better than even odds of a tax deal. The next key milestone is the 2018 budget resolution, which must precede tax law changes because of the reconciliation process that enables passage with a simple 50-vote majority. Any developments that suggest budget talks may materially impair work on tax policy would be worrisome and are where we are focusing our attention in Washington, D.C.
- Putting yesterday’s drop in perspective. The S&P 500 fell 1.5% yesterday, for the second largest decline of the year. This was only the fourth 1% decline of the year, but it was the second 1% drop in a week. Additionally, three times in the past six days the S&P 500 closed either up or down at least 1%. This comes on the heels of going 58 consecutive days without a 1% change, the longest since 2014.
- Finally a big move for the Dow. Yesterday was the first time the Dow closed higher or lower by 1% in 63 trading sessions. That was the longest such streak since 69 in 1995. Going back in history since May 1896 (the inception of the Dow) shows the longest streak ever without a 1% change was 124 days in the first half of 1964. Take note, this incredible streak took place after John F. Kennedy was assassinated.
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