Market Update

• Stocks take a breather after three-day rally. U.S. equities are trading lower this morning as traders mull over disappointing earnings from Dow component Disney, which missed estimates for the first time in five years; this comes after major indexes closed higher for the third straight day on Tuesday. Asian markets finished mixed; the Nikkei posted a slight gain, helped by weakness in the yen overnight. European indexes are lower in midday trading with Italian shares leading declines on the heels of weak earnings in the banking sector. WTI crude oil has been volatile following news that Canadian production would restart after recent wildfires and an announcement from Shell that it would temporarily close a key Nigerian pipeline. Meanwhile, industrial metals continue to slide on China growth concerns, COMEX gold is up more than 1%, and 10-year Treasury yields are little changed near 1.75%.

Macro View

• Mixed picture for consumer discretionary earnings. The consumer discretionary sector has produced the strongest earnings growth (+23%) among all sectors during the first quarter of 2016. However, a deeper dive reveals the intensifying challenges of traditional retailers. Internet retail is thriving, and autos and housing-related industries are producing solid earnings gains; meanwhile, many traditional retailers are being disrupted by the e-commerce wave and are seeing earnings declines well into the double-digits. Our consumer discretionary sector view remains neutral.

• Three-day win streak. The S&P 500 bounced 1.2% for its best one-day gain since March 11. This was also the first three-day win streak since April 18-20 and the 11th three-day win streak of the year. Looking at the previous 10 three-day win streaks, the S&P 500 was higher five days later seven times, so near-term strength is possible. Technically, this recent bounce started right at the S&P 500’s 50-day moving average last week.

• Does anyone believe the rally? The American Association of Individual Investors (AAII) sentiment poll revealed only 22% bulls, the lowest since the mid-February lows. The bears spiked up to 30%, the highest level in 11 weeks as well. Also, bears outnumbered bulls for the second consecutive week. With the S&P 500 only 2.1% away from a new high, this is surprising. Incredibly, the number of bulls has been beneath the long-term average of 38.6% for 59 of the past 61 weeks.

• Over the last month, the LPL Financial Current Conditions Index (CCI) fell 13 points to 176. The CCI remains near the low end of its range for the current expansion, indicating the economy is likely still experiencing below-trend growth. A sharp drop in the shipping traffic component accounted for most of the decline. Seven of the 10 components rose, led by credit spreads and commodity prices. View the CCI.

Monitoring the Week Ahead

Thursday:

• Mester (Hawk)
• Rosengren (Dove)
• George (Hawk)
• Norway: GDP (Q1)
• UK: Bank of England Meeting (No Change Expected)

Friday:

• Retail Sales
• Consumer Sentiment and Inflation Expectations (H1 May)
• Eurozone: GDP (Q1 – Revised)
• Malaysia: GDP (Q1)

Saturday

• China: Industrial Production (Apr)
• China: Retail Sales

Click Here for our detailed Weekly Economic Calendar

 

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.

Treasury inflation-protected securities (TIPS) help eliminate inflation risk to your portfolio, as the principal is adjusted semiannually for inflation based on the Consumer Price Index (CPI)—while providing a real rate of return guaranteed by the U.S. government. However, a few things you need to be aware of is that the CPI might not accurately match the general inflation rate; so the principal balance on TIPS may not keep pace with the actual rate of inflation. The real interest yields on TIPS may rise, especially if there is a sharp spike in interest rates. If so, the rate of return on TIPS could lag behind other types of inflation-protected securities, like floating rate notes and T-bills. TIPs do not pay the inflation-adjusted balance until maturity, and the accrued principal on TIPS could decline, if there is deflation.

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.

Technical Analysis is a methodology for evaluating securities based on statistics generated by market activity, such as past prices, volume and momentum, and is not intended to be used as the sole mechanism for trading decisions. Technical analysts do not attempt to measure a security’s intrinsic value, but instead use charts and other tools to identify patterns and trends. Technical analysis carries inherent risk, chief amongst which is that past performance is not indicative of future results. Technical Analysis should be used in conjunction with Fundamental Analysis within the decision making process and shall include but not be limited to the following considerations: investment thesis, suitability, expected time horizon, and operational factors, such as trading costs are examples.

This research material has been prepared by LPL Financial LLC.

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