Market Update

• Stocks moving lower again. U.S. markets are sliding in early trading, following yesterday’s sell-off that saw every sector outside of energy close lower, after a better than expected reading of the April Consumer Price Index (CPI)and hawkish commentary from Federal Open Market Committee (FOMC) members. With fed fund futures now pricing in a 40% chance of a rate hike in July, high-dividend-yielding sectors, including consumer staples and utilities, were among the worst hit. The 10-year Treasuryyield is showing little reaction, however, hovering near 1.78%; while the dollar is higher and COMEX gold is trading down. Overnight, Asian equities ended lower across the board, with the Shanghai Composite down 1.3% and Japan Nikkei closing at -0.1%. In afternoon trading, European markets are also trending lower, while the pound continues to appreciate against the dollar.

Macro View

• Japan’s GDP surprised to the upside. The Japanese economy got a rare piece of good news overnight. Japan’sgross domestic product (GDP) rose 0.4% during the first quarter and at an annualized rate of 1.7%. This is much higher than the expected 0.1% increase for the first quarter. Consumer spending was also better than expected, up 0.5% versus the 0.2% estimate. The consumer represents 60% of the Japanese economy. Business spending fell -1.4%, worse than the expected decline of -0.8%. The markets, both stocks and currency, have not materially responded to this news. Better consumer spending may support the government’s plans to increase sales taxes to deal with the country’s large budget deficit.

• Income equities hurt by rate hike fears. Dividend darlings consumer staples, utilities, and real estate investment trusts (REIT) led the stock market down on Tuesday following hawkish comments from several Federal Reserve Bank (Fed) officials. The market’s response serves as a reminder that these typically defensive sectors periodically exhibit high downside capture, especially the richly valued consumer staples and utilities. Among income sectors, buoyed by our expectation that the Fed will go slow, we view REITs as most attractive, followed by master limited partnerships (MLP), which have been more oil sensitive than interest rate sensitive.

• The volatility continues. The S&P 500 and Dow both closed beneath their 50-day moving average on heavy volume. The Dow was down over 1%, coming on the heels of being up 1% on Monday and down 1% on Friday. The last time the Dow had three days of alternating 1% moves was in January. Since 1950, it has made it to four days only 12 other times, and only once made it to five back in October 2008. Lastly, the Dow has alternated between gains and losses for eight straight days, the longest streak since March of last year.

• What are utilities telling us? Utilities were up more than 13% for the first four months of the year. Is that telling us anything? Today on the LPL Research blog we will take a closer look at what this could mean. The thinking is that when defensive groups like utilities lead by a wide margin, it presents a potential warning sign. Well, the last time utilities were up this much after four months to start a year was 2013. The S&P 500 gained nearly 16% the rest of the year, so this warning didn’t work that time. Be on the lookout for our blog later today as we dive more into this subject.

Monitoring the Week Ahead

Wednesday

• FOMC Minutes
• UK: Unemployment Rate (Mar)

Thursday

• Philadelphia Fed Mfg. Index (May)
• Leading Indicators (Apr)
• G-7 Finance Ministers Meeting in Japan
• Eurozone: Minutes of the April ECB Policy Meeting Released
• Indonesia: Central Bank Meeting (No Change Expected)

Friday

• Existing Home Sales (Apr)

Saturday

• Japan: Imports and Exports (Apr)

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.

Investing in MLPs involves additional risks as compared with the risks of investing in common stock, including risks related to cash flow, dilution, and voting rights. MLPs may trade less frequently than larger companies due to their smaller capitalizations, which may result in erratic price movement or difficulty in buying or selling. MLPs are subject to significant regulation and may be adversely affected by changes in the regulatory environment, including the risk that an MLP could lose its tax status as a partnership. Additional management fees and other expenses are associated with investing in MLP funds.

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.

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.

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