Market Update: Monday, September 18, 2017

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Market Recap

  • Major U.S. indexes posted several new highs last week, including Friday as investors shrugged off another North Korean missile test. S&P 500 Index +0.2% (+1.4% on the week), Dow +0.3%, Nasdaq +0.3%.
  • All sectors rose on the week, financials led as rates increased; telecommunications led on Friday as AT&T gained 2.2%.
  • Treasury yields climbed last week ahead of Federal Reserve (Fed) policy meeting; 10-year note +14 basis points (0.14%), +2 basis points (0.02%) on Friday to 2.20%.
  • CommoditiesCOMEX gold -2.7% to $1324/oz., WTI crude oil flat Friday, but +4.6% to ~$50/bbl. for the week; industrial metals continued to decline.

Overnight & This Morning

  • U.S. indexes opened higher; continuation of last week’s strength thanks to lull in North Korean tensions.
  • European stocks rebounding from Friday slide on little news. STOXX Europe 600 +0.4%.
  • Asian stocks mostly up overnight; Japan closed due to holiday, KOSPI (+1.4%) outperforming after quiet weekend with North Korea, Hang Seng +1.3%, Shanghai Composite +0.3%.
  • U.S. dollar strengthening vs. most major currencies.
  • Safe havens like gold, Treasuries, yen all lower as upbeat sentiment favors risk assets.
  • Commodities – WTI crude (-0.5%) down for the first time in five sessions, but still near $50/bbl.; gold -0.7% to $1315/oz.; industrial metals mixed with copper +0.8%.
  • President Trump will make his first appearance at United Nations; likely to comment on North Korea.
  • Federal Open Market Committee (FOMC) meeting kicks off tomorrow. Traders do not expect a rate hike, but  balance sheet normalization plan is anticipated.

 

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Key Insights

  • How can things be this calm? In the face of the worst hurricane to hit the United States in over a decade and ongoing tensions with North Korea, equity prices continue to climb in a historically calm fashion. Many have asked us how this is possible. To put it in perspective, the S&P 500 Index’s daily trading range has been within 0.3% for four consecutive days, marking the longest streak ever. So one could argue that it was the calmest four days ever, yet the headlines were anything but tranquil, though there is no clear answer as to why this is happening. Is it due to the big move to passive investments? Algos? The massive bets on future volatility in the derivatives markets? In reality, it could be something else or a combination of those things. Remember, after President Kennedy was assassinated in 1963, the following year was one of the calmest years ever. Anyone who was around for that tragic event would probably never have ever expected that. The bottom line is that the global economy continues to improve, led by strong corporate earnings growth and modest, yet consistent economic growth. Although we do not expect things to remain this calm over the rest of the year, thus far 2017 is in line with 1995 and 1964/1965 for the calmest market periods ever.

Macro Notes

  • Growth has been on quite a roll. Based on the Russell 1000 style indexes, growth stocks’ 18% year-to-date gain is 14% ahead of value’s 4% advance. Looking back even further, growth’s outperformance is nothing new. Over the past 10 years, which includes financial crisis, growth has outpaced value by about 50%, marking the longest period of growth outperformance ever based on Fama-French statistics dating back to the 1930s. Since that observation sets off contrarian alarm bells in our heads, this week’s Weekly Market Commentary discusses the prospects for a value rebound.
  • Inflation and the Fed. The Fed’s policy making arm, the FOMC, will hold the sixth of its eight meetings this week. We do not expect a rate hike, but do expect to see the Fed announce the start of its balance sheet normalization program. Markets will be parsing the Fed statement, economic projections, and press conference comments for any sign of a shift in the Fed’s inflation expectations and what that could mean for the future path of rate hikes. We take a look at the Fed’s inflation views more closely in this week’s Weekly Economic Commentary, due out later today.
  • More new highs. The Dow closed at a new high four consecutive days and was higher six days in a row. Incredibly, the Dow had a 9-day new-high streak in July and August, and a 12-day new-high streak in February. The S&P 500, meanwhile, made new highs four of the past five days, but the real news was in the lack of action. This marks the first time that the S&P 500 hasn’t traded in a daily range of more than 0.3% for four consecutive days, based on reliable one-day data back to 1970.
  • The real weakness in September starts now. Historically, September is the weakest month on average for the S&P 500 going back to 1950, though it has been the second weakest month over the past 20 years (only August is worse). What most investors don’t realize though is that the first half of the month tends to be strong, then the latter half of the month is when seasonal weakness tends to take over. Today on the LPL Research blog we will take a closer look at this phenomenon.

 

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Click Here for our detailed Weekly Economic Calendar

Monday

  • NAHB Market Index (Sept)
  • Total US Treasury International Capital Inflows (July)
  • Italy: Trade Balance (July)
  • Eurozone: CPI (Aug)
  • BOE: Carney
  • Japan: Outright Bond Purchase

 Tuesday

  • Housing Starts & Building Permits (Aug)
  • Import & Export Price Index (Aug)
  • Current Account Balance (Q2)
  • Eurozone: Current Account (July)
  • Germany: ZEW Survey (Sept)
  • Eurozone: ZEW Survey (Sept)
  • Japan: Money Flow (Q2)
  • Japan: Trade Balance (Aug)
  • Japan: Imports & Exports (Aug)

Wednesday

  • MBA Mortgage Applications (Sept 15)
  • Existing Homes Sales (Aug)
  • FOMC Rate Decision
  • Yellen* (Dove)
  • Germany: PPI (Aug)
  • UK: Retail Sales (Aug)
  • New Zealand: GDP (Q2)
  • BOJ: Policy-Balance Rate
  • BOJ: Monetary Policy Statement

 Thursday

  • Initial Jobless Claims (Sept 16)
  • Continuing Claims (Sept 9)
  • Philadelphia Fed Manufacturing Index (July)
  • FHFA* House Price Index (July)
  • Leading Economic Indicators (Aug)
  • Household Change in Net Worth (Q2)
  • Eurozone: Consumer Confidence (Sept)
  • Argentina: GDP (Q2)
  • BOJ: Kuroda
  • ECB Publishes Economic Bulletin
  • Japan: All Industry Activity

Friday

  • Markit US Manufacturing & Services PMI (Sept)
  • Williams (Dove)
  • George (Dove)
  • Kaplan (Hawk)
  • France: GDP (Q2)
  • France: Markit France
  • France: Manufacturing & Services PMI (Sept)
  • Germany: Markit Germany
  • Germany: Manufacturing & Services PMI (Sept)
  • Eurozone: Markit Eurozone
  • Canada: CPI (Aug)

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.

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.

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.

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.

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