Wage Data Bucks the Inflation Narrative

Financial markets are desperately looking for direction these days.

One issue rattling markets is the constant debate over the state of inflation. Inflationary pressures have accelerated this year, but over the past month, investors have braced for the threat of deflation. As shown in the LPL Chart of the Day, breakeven rates, or the difference between the yields of nominal Treasuries and those of Treasury Inflation-Protected Securities (TIPS), plunged last month. The 2-year breakeven rate is now sitting near a 16-month low.

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The Worst Month of the Year

Well, here it comes—September. It’s widely considered the worst month of the year for equities for good reason, since it has historically performed the worst. Per Ryan Detrick, senior market strategist, “September is the banana peel month, as some of the largest slips tend to take place during this month. Although the economy is still quite strong, and stocks are marking hew highs, this doesn’t mean some usual September volatility is out of the question—in fact, we’d be surprised if volatility didn’t pick up given midterm years tend to see big moves in the months leading up to the November election.”

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Weekly Update 8/31/2018 –Trade Returns to the Spotlight

US: S&P 500 Index  +0.9%, Dow +0.1%, Nasdaq +2.1%
Europe: STOXX Europe 600 -0.3%, German DAX -0.3% France CAC 40 -0.5%, U.K. FTSE 100 -0.8%
Asia: Japan Nikkei 1.2%, China Shanghai Composite -0.2%, Korea KOSPI  1.3%
Rates/Commodities: 10-Year Treasury yield +4 basis points to 2.86%, WTI crude oil 1.7%, COMEX gold -0.6%

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The Surprise Bull Move Continues

The incredible summer rally continues, as the S&P 500 Index is only two days away from possibly notching a fifth consecutive monthly gain. Not to be outdone, the usually tricky month of August is looking to potentially post one of its best returns going back to 2000.

But wait, there’s more: Since 1950, no month has had fewer all-time highs than the month of August, but with two days to go, it has reached new all-time highs for four consecutive days. That hasn’t happened in August since 1987.

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Key Takeaways From An Excellent Earnings Season

It has been an outstanding earnings season by many measures. Second quarter numbers were strong, even without the boost from the new tax law. With just a small handful of companies left to report, S&P 500 Index earnings are up about 25% year over year, or 18-19% without the boost from corporate tax cuts. A record 80% of S&P 500 companies exceeded quarterly earnings targets, according to data from Thomson Reuters, while index earnings have now beaten expectations 37 straight quarters.

“Strong revenue growth and strong operating cash flows, in addition to tax cuts, are driving overall profit growth,” noted LPL Chief Investment Strategist John Lynch.

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Market Update: Wednesday, August 29, 2018

LPLResearch-Macro-View

Daily Insights

  • GDP revision reinforces solid second-quarter growth. Gross domestic product (GDP) growth was revised up to 4.2% today (from 4.1%), despite consensus expectations for a downward revision to 4.0%. The contribution to output from business spending was 0.15% higher than the original print, while the contribution from net exports was 0.11% higher. Overall, we remain encouraged by robust economic growth, and we still expect up to 3.0% GDP growth in 2018 as the pace of expansion moderates in the second half of the year.*

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