Market Update: Tuesday, April 17, 2018

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Daily Insights

  • The Federal Reserve (Fed) announced the nomination of Richard Clarida as vice chairman of the Board of Governors. The makeup of the Fed Board continues to suggest a moderate blend of “gradualists” that we believe will continue to support existing policy and the equity markets as the leadership transition continues from Janet Yellen to Jay Powell. Remember, the “great rotation” from bonds to equities has not yet begun.

  • Gross domestic product (GDP) in China rose +6.8% in the first quarter–this was better than consensus expectations, which feared a moderation in output, especially given the recent slip up in wholesale prices and concern over tariffs. This pace of growth matched the previous quarter’s output, though. Much of the concern had to do with Beijing’s efforts to dampen debt growth, yet retail sales (+9.8% quarter over quarter) and industrial production (+6.8% quarter over quarter) indicated Chinese output remains robust. In addition, the growing trade concerns have had limited impact on economic activity as China’s trade surplus with the United States continued to widen in the first quarter.

  • China’s central bank announced a surprise cut in bank reserve requirements, reducing the amount of cash most commercial and foreign banks must hold in order to pay back loans obtained via the central bank’s medium-term lending facility. The move is intended to free up lending for smaller firms and is somewhat surprising, given that GDP growth exceeded expectations. We continue to view the transition in economic drivers from manufacturing/exports to services/consumption as a long-term positive and maintain our global forecast favoring emerging markets over developed (ex. U.S.).

  • The S&P 500 Index closed above previous resistance of 2675. It will be important to monitor metrics such as an increasing number of stocks advancing versus declining for signs that that the strength is sustainable, but the move through this level is noteworthy. Positive performance in small caps and transports are also favorable and supportive factors. Fundamentally, we remain positive on earnings gains propelling market gains in 2018.

  • What are real yields really saying? Real (inflation-adjusted) yields, can be a good barometer of the state of monetary conditions, as they represent the true cost of capital for domestic companies. Therefore, the meaningful rise in real yields in early 2018 may have contributed to equity market weakness and their subsequent modest decline may have eased some of that pressure. Additionally, the convergence of various maturities of real yields may be pointing to indecision from market participants as to future economic growth levels. This phenomenon has also been the driving factor in the flattening of the Treasury yield curve over the last year. We discuss real yields in more detail in this week’s Bond Market Perspectives, due out later today.

  • (Un)happy tax day! Whether you received a tax refund or need to cut a check to Uncle Sam, you gave a chunk of your hard-earned money to the government. On a positive note, this afternoon on the LPL Research blog we’ll look at some of the estimated impacts of the 2017 Tax Cuts and Jobs Act, as well as the S&P 500’s historical performance in April–it’s not all showers.

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