Market Update: Tuesday, April 25, 2017

MarketUpdate_header

  • Equity gains continue amid earnings barrage. (10:21am ET) U.S. stocks are looking to build on yesterday’s momentum as investors digest a swath of earnings today, including five Dow components ahead of the opening bell. Yesterday, the MSCI All-Country World Index (+1.6%) hit a new record high, and the S&P 500 (+1.1%) followed suit on strength in the heavily-weighted financials (+2.2%) and industrials (+1.3%) sectors. Reports that President Trump is expected to attempt to lower the corporate tax rate to 15% when he outlines his tax plan Wednesday are also providing a tailwind. Overseas, Asian markets advanced for the second straight day led by the Nikkei (+1.1%) and Hang Seng (+1.3%); the Shanghai Composite (+0.2%) stabilized overnight after being left out of Monday’s global equity lift.  European markets are holding up as well; the STOXX 600 Index (+0.3%) is trading comfortably in the green. Meanwhile, the yield on the 10-year Treasury is trying to climb back above the 2.30% mark, oil is slightly lower to $49.10/barrel, and COMEX gold ($1268/oz.) is down more than half a percent.

MacroView_header

  • Treasury prices moved higher on the week. Treasury bonds were higher in price last week with the 2-year lower in yield by 0.04%, the 5-year yield lower by 0.03% at 1.74%, and the 10-year also lower by 0.03% at 2.21%. Rates moved higher on Monday following the outcome of the initial round of the French election, with the 10-year yield now near 2.31%. The probability of a Fed rate hike for the June meeting has also increased in recent days to 73%. We discuss the recent volatility in rate hike expectations in this week’s Bond Market Perspectives, due out later today.
  • The yield curve flattened. The Treasury yield curve flattened with the 2’s to 10’s slope, a measure of the steepness of the yield curve, ending the week at 1.04%. The 2’s to 30’s yield slope was also flatter by 0.04% to 1.70% as the 30-year Treasury bond finished the week at 2.89%.
  • Inflation expectations are lower. The 10-year breakeven inflation rate finished the week lower from 1.94% to 1.85% according to Federal Reserve Economic Data. 1.85% is the lowest inflation expectation number this year, and below the Fed’s 2% inflation target.
  • Credit spreads widen from their March lows, making corporate prices cheaper. The Bloomberg Barclays US Aggregate Corporate Average OAS index which measures the yield spread relative to US Treasuries, finished the week at 1.23%, up from its low (year-to-date) of 1.11% on March 6, 2017.  The historical average since 1989 has been 1.35%. For context, the highest spread for this index reached 5.55% on December 31, 2008.
  • High yield spreads. High yield spreads as measured by the Bloomberg Barclays High Yield Average OAS index finished the week at 3.92%, higher than the 3.44% low (year-to-date) on March 2 2017. Higher OAS spreads generally equate to lower bond prices, a negative to bond holders, while tightening spreads can positively impact bond prices. We continue to believe that the income generated by high yield bonds remain attractive in a low yield world, but also note that current valuations leave little room for error in economic and default forecasts, leaving us neutral on the sector overall.
  • Municipal supply begins to build. Supply in the municipal bond market is building as issuers are enticed by lower yields in the sector. Municipal bonds have rallied since March 14, 2017 but this could dissipate as a result of increased supply. The 30-day visible supply as measured by the Bond Buyer has grown to $14.6 billion, well above its trailing 30-day average of $12 billion.
  • Big day for European equities. There was a substantial relief rally across Europe after the French election eased anti-euro concerns. The Paris CAC 40 gained 4.1% for the best day since August 2015, while the Euro STOXX 50 added 4.0% for the first time since August 2015 as well. After the gains, most European countries are now outpacing U.S. equity gains this year. The big question is can this strength stick? Today on the LPL Research blog we will take a closer look European equity technicals, specifically a 17-year breakout for the Paris CAC 40, which could bode well for continued higher prices.
  • Volatility implosion. The CBOE Volatility Index (VIX) closed down 25.9% yesterday, as the worst fears over the French election subsided. Going back to 1990, this was the fourth largest one-day drop, and the largest since August 2011. We’ve seen a similar pattern play out ahead of Brexit and the U.S. election. Fear grows and the VIX increases, only to decrease after the event is over. Last, the S&P 500 gained more than 1% for only the second time this year and first time since March 1, 2017.

 

MonitoringWeek_header

Click Here for our detailed Weekly Economic Calendar

Tuesday

  • New Home Sales (Mar)

Wednesday

  • Bank of Japan (BOJ) Outlook Report & Monetary Policy Statement
  • BOJ Interest Rate Decision

Thursday

Friday

  • GDP (Q1)
  • UK: GDP (Q1)
  • Eurozone: CPI (Apr)

Saturday

  • EU Leaders Summit
  • China: Mfg. & Non-Mfg. PMI (Apr)

 

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.

 Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

 Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

 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.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

 Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

 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.

 This research material has been prepared by LPL Financial LLC.

 To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

 Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

 Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

 Member FINRA/SIPC
Tracking # 1-602634

 

Spring Selling Heats Up; What’s Next for Homebuilders?

Spring selling season is heating up across the country, but will homebuilders benefit? Let’s take a technical look at the S&P 500 Homebuilder Index, which is a gauge for the industry’s growth. As the green line in the chart below indicates, the most recent month-end price for the index remains above its 10-month moving average, suggesting a long-term bullish trend that began in January 2011 remains intact[1].

New Home Sales

Each month the U.S. Census Bureau reports the volume of new, single-family houses sold in the U.S.   The next report is scheduled for release on Tuesday, April 25 with the consensus estimate (average estimate of a sample of economists) at 583,000.[2]

One metric used to determine sentiment towards homebuilders, which influences price movement, is new home sales volume versus the consensus estimate. Looking back over the past 10 years (see below table), the reported data beat the consensus 47 times, or 39% of the time. Six months later, the S&P 500 Homebuilder Index was higher 57% of the time by an average price return of 6.7%.  Looking out 12 months, the returns were higher 60% of the time, with an average price return of 14.5%.

If new home sales volume is lower than the consensus, longer-term returns still tend to be modestly higher. Over the same period, the reported data were lower than the consensus value 61 times, yet twelve months later the S&P 500 Homebuilder Index was higher 57% of the time by an average price return of 3.9%.

We will continue to monitor new home sales data as the spring selling season continues to help determine whether homebuilders may to continue to move higher.

[1] A rule of thumb is that if the price is above its moving average, the trend is likely to be upward sloping or bullish.  Some technical analysts use a monthly price chart with a 10-period moving average to evaluate the long-term trend.

[2] Bloomberg data, 4/21/17

 

IMPORTANT DISCLOSURES

Past performance is no guarantee of future results. All indexes are unmanaged and cannot be invested into directly.

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.

The economic forecasts set forth in the presentation may not develop as predicted.
Investing in stock includes numerous specific risks including: the fluctuation of dividend, loss of principal and potential illiquidity of the investment in a falling market.

Because of their narrow focus, specialty sector investing, such as healthcare, financials, or energy, will be subject to greater volatility than investing more broadly across many sectors and companies.

US New One Family Houses Sold Annual: This index tracks sales of newly constructed homes during the reference period. The Implicit US index is computed by taking the number of houses sold in the US and dividing it by the seasonally adjusted number of houses sold in the US.

S&P 500 Homebuilding Sub Industry GICS Level 4 Index: Standard and Poor’s 500 Homebuilding Index is a capitalization-weighted index. The index was developed with a base level of 10 for the 1941-43 base period. The parent index is SPX. This is a GICS Level 4 Sub-Industry group. Intraday values are calculated by Bloomberg and not supported by S&P DJI, however the close price is the official close price calculated by S&P DJI.

This research material has been prepared by LPL Financial LLC.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor Member FINRA/SIPC

Tracking # 1-602235 (Exp. 4/18)

 

Market Update: Monday, April 24, 2017

MarketUpdate_header

  • U.S. up, Europe surging in wake of French vote. (9:47am ET) U.S. equities are tracking global markets higher this morning following yesterday’s first round of the French presidential elections in which Emmanuel Macron and Marine Le Pen finished in the top spots, triggering a run-off vote set for May 7. Friday’s session concluded with the major indexes posting modest losses ahead of the vote, as the S&P 500 (-0.3%) was led lower by the telecom (-1.6%) and financials (-0.9%) sectors, with only utilities (+0.5%) and industrials (+0.1%) finishing positive. Overseas, Asian indexes reacted positively to the French election as the Nikkei (+1.4%) and Hang Seng (+0.4%) gapped higher; the notable exception was the Shanghai Composite (-1.4%), which fell amidst a government crackdown on leverage. European indexes are spiking as the STOXX 600 (+1.8%) benefits from investors betting on the pro-E.U. candidate Macron; Frances’s CAC is up more than 4% to its highest level in nine years. Finally, the yield on the 10-year Treasury has jumped to 2.30%, WTI crude oil (-0.5%) is just below $50/barrel, and COMEX gold ($1271/oz.) has dropped 1.4%.

MacroView_header

  • Solid start to Q1 earnings season. With 95 S&P 500 companies having reported, Thomson-tracked S&P 500 earnings for first quarter 2017 point to an 11.2% year-over-year increase, compared with consensus estimates of +10.2% as of quarter end on April 1, 2017. The early upside has been driven largely by financials, which are tracking to a 19.0% year-over-year increase, more than 4% above quarter-end estimates. Industrials have also surprised to the upside thus far. Conversely, since earnings season began, first quarter earnings estimates have been cut for the consumer discretionary, energy, and telecom sectors, though it is probably too early to call any of these sectors “earnings season losers.” This week (4/24/17-4/28/17) is the busiest week of earnings season with 194 S&P 500 companies slated to report. All of the widely-held sectors are well represented on the earnings calendar, led by industrials.

  • Leading indicators rise for seventh consecutive month. The Conference Board’s Leading Economic Index (LEI) pushed 0.4% higher in March, ahead of expectations but decelerating from a downwardly revised 0.5% increase in February. Eight of 10 indicators increased in March, led by contributions from the yield curve and strong new manufacturing orders survey data. The LEI has climbed 3.5% year over year, a rate that has historically been associated with low odds of a recession occurring within the next year.
  • The latest Beige Book suggests a steady economy with modest wage pressure. The Federal Reserve (Fed) released its April Beige Book last week ahead of the May 2-3, 2017 Federal Open Market Committee (FOMC) meeting. Our Beige Book Barometer (strong words minus weak words) rose to +77 in April, its highest level since +84 in January 2016, indicating continued steady economic growth in early 2017 with some signs of potential acceleration. Words related to wage pressure have held steady over the last six months at levels above the 2015-2016 average, indicating the appearance of modest but still manageable wage pressure.
  • Important period for European markets. In this week’s Weekly Market Commentary, we examine the importance of European market earnings, particularly in important sectors like energy and banking. Expectations remain high for earnings growth throughout 2017, which has kept us cautious on investing in European markets. Political risks also remain, but seem to be abating as we get past the first round of French Presidential elections.

MonitoringWeek_header

Click Here for our detailed Weekly Economic Calendar

Monday

  • Germany: Ifo (Apr)

Tuesday

  • New Home Sales (Mar)

Wednesday

  • BOJ Outlook Report & Monetary Policy Statement
  • BOJ Interest Rate Decision

Thursday

Friday

  • GDP (Q1)
  • UK: GDP (Q1)
  • Eurozone: CPI (Apr)

Saturday

  • EU Leaders Summit
  • China: Mfg. & Non-Mfg. PMI (Apr)

 

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.

 Treasury Inflation-Protected Securities (TIPS) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

 Bank loans are loans issued by below investment-grade companies for short-term funding purposes with higher yield than short-term debt and involve risk.

 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.

High-yield/junk bonds are not investment-grade securities, involve substantial risks, and generally should be part of the diversified portfolio of sophisticated investors.

Municipal bonds are subject to availability, price, and to market and interest rate risk if sold prior to maturity. Bond values will decline as interest rate rise. Interest income may be subject to the alternative minimum tax. Federally tax-free but other state and local taxes may apply.

 Investing in real estate/REITs involves special risks such as potential illiquidity and may not be suitable for all investors. There is no assurance that the investment objectives of this program will be attained.

 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.

 This research material has been prepared by LPL Financial LLC.

 To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

 Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

 Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

 Member FINRA/SIPC
Tracking # 1-602159