In the spirit of March Madness, we have compiled our “Sweet 16” for the stock market, complete with some top seeds and potential bracket busters. We identified 16 keys for stocks for the remainder of the year and assessed their potential market implications. Continue reading
- The stock market’s “Sweet 16.” In the spirit of March Madness and an exciting NCAA college basketball tournament that has already brought some historic upsets and exciting buzzer beaters, our latest Weekly Market Commentary features our “Sweet 16” keys for stocks over the remainder of the year, which we will preview today on the LPL Research blog. Among the positives: U.S. and global economic growth, earnings, and technicals; among the negatives: trade policy. Collectively, we expect these drivers to push stocks higher over the balance of 2018, though we acknowledge that volatility could stay with us. We’ll take a deeper dive into some of these market drivers next week in our “Final Four.”
- Fed monetary policy meeting headlines the week. The U.S. economic calendar includes new and existing home sales, the Leading Economic Index, the Kansas City Federal Reserve (Fed) Manufacturing Index, and durable goods orders. However, investors’ focus will be on the Fed’s monetary policy meeting on Tuesday and Wednesday, where analysts expect a 0.25% rate hike announcement. Overseas, manufacturing and services Purchasing Managers’ Index reports for the Eurozone, France, and Germany should garner attention, in addition to ZEW surveys for the Eurozone and Germany. In the pacific region, Japan is set to release a series of economic data covering trade, inflation, and manufacturing, while China reports foreign direct investment and property prices, a closely watched metric tied to the health of the Chinese consumer.
- Another shutdown? Political risk is hardly new for investors, but markets may be increasingly focused on Washington, D.C. this week amidst the latest round of budget battles and the flurry of headlines surrounding the Mueller investigation. Congress must agree to details on its spending bill by the end of the week or face another partial government shutdown. A shutdown, which we view as unlikely, would almost certainly be short-lived; but with 60 votes needed in the Senate, an impasse is possible.
- Fed outlook expected to hold steady despite more optimistic economic projections. Fed Chair Jay Powell will preside over his first monetary policy meeting on Tuesday and Wednesday. With a rate hike at the conclusion of Wednesday’s meeting already priced in according to Fed fund futures, market participants will be focused on changes to the Fed’s economic projections, last released in December 2017, and Powell’s press conference following the meeting’s conclusion. We expect economic projections to rise, based on fiscal stimulus from the new tax law and an increase in spending limits over the next two years, but until we see stronger signs of a pick-up in inflation, our base case remains three rate hikes over the course of 2018. We explore in more detail later today in this week’s Weekly Economic Commentary.
US: S&P 500 Index -1.24%, Dow -1.56%, Nasdaq -1.04%
Europe: STOXX Europe 600 -0.14%, German DAX +0.35%, France CAC 40 +0.16%, U.K. FTSE 100 -1.17%
Asia: Japan Nikkei +0.97%, China Shanghai Composite -1.13%, Korea KOSPI +1.40%
Rates/Commodities: 10-Year Treasury yield -4 basis points to 2.85%, WTI crude oil +0.40%, COMEX gold -0.84%
Global equity markets struggled finding reasons to move higher after investors started the week digesting an announcement from the Trump administration that it intends to levy more tariffs, this time on China; meanwhile, European Union officials are gearing up for possible confrontations with the U.S. over the recently enacted tariffs on aluminum and steel. Elsewhere, United States economic data Continue reading
- MLPs hit by FERC ruling. Yesterday, the Federal Energy Regulatory Commission (FERC) decided it would no longer allow master limited partnerships (MLP) to recover an income tax allowance in their regulated cost of service rates, driving the Alerian MLP Index down over 10% intraday before it closed about 4.5% lower. Though the policy change, which only impacts regulated interstate oil and gas pipelines and not all pipeline partnerships, can be appealed, our sense is that the rule may stick. As discussed in today’s blog, our investment case for MLPs has been based on U.S. energy production growth, attractive yields, and deregulation. We believe these factors remain favorable, and the transition to more internal funding sources (and less reliance on capital markets) is positive in the long run. However, the transition has been bumpy and MLP investors have faced several other headwinds, including: energy sector weakness, higher interest rates, and slower distribution growth.
- Housing starts fall more than expected. Housing starts in the United States fell 7.0% month over month in February (-3.8% expected), dragged down by multifamily construction starts which dropped more than 26%. Building permits also fell for the month, with permits for single-family homes slipping 0.6% to a 872,000-unit pace. Despite the drop, it is important to remember that housing starts remain near post-recession highs, and the rate of construction in January was the highest since 2008. In addition, the market remains buoyed by a strong labor market and firm economic fundamentals.
- Eurozone inflation still low. The February Eurozone Consumer Price Index came in 1.1% higher year over year, versus an expected +1.2% print. The month-over-month reading met consensus expectations at +0.2%; however, we’ve noticed a slowdown in some of the Eurozone data as private consumption has softened. Although inflation is still well beneath long-term targets, annualized growth in gross domestic product is tracking to a respectable 2.5% in the first quarter.
- Four in a row. The S&P 500 Index is down four days in a row for the first time this year and the first time since December 2017. It hasn’t been down five days in a row since before the U.S. election in November 2016 when it fell nine straight sessions. Additionally, should the S&P 500 close red today it would be down every day of the week (assuming a five-day week). Again, the last time this happened was in early November 2016. Trivia stat for you: the year 2014 remains the only year to never have a single four-day losing streak during a calendar year.
Thursday’s news that the Federal Energy Regulatory Commission (FERC) will no longer allow master limited partnerships (MLP) to recover an income tax allowance in their regulated cost of service rates drove the group down about 4.5% on the day (the benchmark Alerian MLP Index was down over 10% at one point on an intra-day basis). The policy change, which only impacts regulated interstate oil and gas pipelines and not all pipeline partnerships, can be appealed but our sense is Continue reading
After a large number of companies beat earnings growth expectations and upped guidance in the fourth quarter, many project earnings strength to continue this year. In fact, we recently upgraded our S&P 500 Index earnings expectations to $152.50 from $147.50 as a result of accelerating U.S. and global economic growth prospects that we expect to boost companies’ bottom lines. Continue reading
- Data in China continues to point to solid steady growth ahead. Although trade policy remains the key issue for global investors at the moment, we should not lose sight of the latest round of solid economic data out of China, including exports, industrial production, capital investment, and retail sales. The solid economic growth outlook in China supports our positive view of emerging market (EM) equities.
- Trade tensions to moderate? Noted free trade advocate Larry Kudlow’s appointment to head President Trump’s National Economic Council could provide a buffer against some of the more hawkish trade views in the White House. Uncertainty and risk remain, and the trade “tit-for-tat” will probably have a negative, though likely very limited, impact on economic growth and profit margins for steel users. However, we take this news as incrementally positive. Mr. Kudlow also supports a strong dollar and may help arrest the greenback’s slide. Suitable investors may get a chance to add EM equities on weakness amid the flurry of trade headlines. The White House will reportedly announce $30 billion or more in fresh China tariffs in the coming weeks on roughly 100 wide-ranging products.
- Senate votes to ease oversight on small and medium-sized banks. The move to roll back part of the Dodd-Frank law, which still needs to pass the House, would reduce the number of banks considered systemically important and subject to the toughest oversight by raising the asset threshold from $50 billion to $250 billion. Though widely anticipated, should it become law, the bill may be positive for regional and super-regional banks. We maintain our positive view of the financials sector and banks in particular.
- What if earnings are strong? After a very impressive fourth quarter earnings season, many on Wall Street expect the strength to continue through this year, as do we. In fact, we upped our S&P 500 EPS target to $152.50, which is a mid-teens growth rate. Aside from the obvious positive that higher earnings are better for stocks, why does it matter to investors? We explain this afternoon on the LPL Research blog.
On March 10, 2000, at the peak of the internet bubble, the Nasdaq closed at 5048.62. It took more than 15 years, posting 113 new highs along the way, for the index to break back above that record-high level. Though, from another perspective, it may only just be getting into unchartered territory. Continue reading
- U.S. markets closed lower despite early advance; news from Washington, D.C. shifting trade focus to China outweighed in-line core CPI report. S&P 500 Index -0.6%, Nasdaq -1.0%, Dow -0.7%, Russell 2000 -0.6%.
- REITs (+0.3%), utilities (+0.2%) continued to benefit from interest rate decline, which weighted on financials (-0.5%); technology (-1.2%) also lagged on valuation concerns.
- Negative breadth on NYSE (1.5:1); trading volume below average (~87% of 30-day avg.).
- Treasuries strengthened; 10-yr. note yield -3 basis points to 2.84%.
- Commodities: WTI crude oil -1.2% to $60.64/bbl.; COMEX gold higher to $1325/oz.; industrial metals all higher; U.S. dollar weakened vs. most major crosses.
- Economic data: Domestic core CPI reading met expectations (0.2%), helping to abate worries of accelerating inflation. Continue reading
Inflation has been a key concern for markets after wage growth accelerated in the January employment report (released at the beginning of February), and the Consumer Price Index (CPI) rose more than expected. With February data now available, should investors be relieved or more anxious? Continue reading