Market Update

• U.S. opens flat as earnings season heats up; overseas markets little changed. U.S. indexes are little changed this morning as investors digest a few premarket earnings reports (including financial giant Bank of America) and brace for the week ahead, during which nearly 20% of S&P 500 companies are due to report. Stocks ended mixed on Friday, weighed down by selling in financials and consumer discretionary, which came despite strong June retail sales data; but the week was highlighted by record high closes for both the S&P 500 and the Dow. Overseas, amid little economic news, a failed military coup in Turkey late last week is garnering focus and keeping investors on edge, leaving European equities mixed. Asian indexes finished the Monday session on a similar note: China’s Shanghai Composite fell 0.4% while stocks in Hong Kong rose 0.7%; Japanese markets were closed for a holiday. Elsewhere, WTI crude oil is off more than 1%, COMEX gold is near flat, and 10-year Treasury yields are up slightly.

Macro View

• Earnings recession likely to continue as first peak earnings week gets underway. Sector representation broadens out beyond financials this week with 91 S&P 500 companies slated to report. With just 36 S&P 500 companies having reported second quarter 2016 results thus far, Thomson Reuters consensus estimates are tracking to a 4.7% year-over-year decline, slightly below the estimate as of quarter end; this quarter would mark the fourth straight drop. Excluding energy, and adding the typical 3-4% upside surprise, S&P 500 earnings could reach +2-3% for the quarter when all results are in.

• Earnings estimates little changed since quarter end.Considering the late-quarter surprise from Brexit, and the resulting U.S. dollar rally and pressure on financials, the resilience of earnings estimates in recent weeks is encouraging. It is early and we have observed modest weakness in financials and industrials earnings revisions, but we believe the second half earnings rebound thesis remains intact. Price-to-earnings ratios (PE) are above average and near post-2008 highs at 17.1 and 18.8 (forward and trailing), but are still reasonable, in our view, given low interest rates.

• Week ahead: post-Brexit data on U.S. economy plus a big week for earnings. July (post-Brexit) readings on manufacturing, homebuilders sentiment, and initial claims this week will compete for attention with earnings reports from S&P 500 companies and the Republican National Convention. It’s a quiet week for the Federal Reserve Bank (Fed) ahead of the July 26-27 Federal Open Market Committee (FOMC) meeting, but the European Central Bank’s (ECB) meeting will be watched closely, as it’s the first post-Brexit meeting. The week ends with a meeting of the G-20 Finance Ministers in China. Please see our Global Economic and Policy Calendar for details

• China property prices continue to boom. The Chinese government provided data on the property markets in June over the weekend. We use the term “markets” deliberately, as the information can vary greatly from major “tier one” citizens to smaller ones. Prices of newly constructed homes were up in 57 of 70 major cities. Less than a year ago–in the fall of 2015–just 12 of 70 cities saw year-over-year price increases. Prices are up 31% in the tier one cities. Some of this price increase is due to higher demand for luxury properties. Real estate is a much more significant store of wealth for rich Chinese citizens, who do not trust the volatility of the stock market. The data in China continue to point to stability in the Chinese economy, not a hard landing. The next key data in China are the July Purchasing Managers’ Index (PMI) data due out at the end of the month.

• Another solid week for equities. The S&P 500 just missed being positive every day of the week on Friday by dropping 0.1%. The good news is that it once again closed at a new weekly all-time high and gained 1.5% for the week, led by materials and financials, with utilities the only group lower. This was actually the third straight weekly gain of more than 1% for the first time since a streak of five coming off of the February lows. Going back 10 years, the S&P 500 has been up for three consecutive weeks eight other times, and it was higher the next week during five of those occurrences with an average return of 0.9%. Taking it out further, a month later it was up seven out of those nine times with a median return of 1.9%.

• Equities are still historically overbought. The S&P 500 refuses to pullback. After gaining for five straight days before a minor drop on Friday, equities are still extremely extended in the near term. In fact, the S&P 500 has now closed more than two standard deviations above its 50-day moving average for six consecutive trading sessions. That has only happened four other times going back 15 years. Although in the near term some consolidation is likely, it is worth noting that three months later the S&P 500 has been higher each time for gains of 2.4%, 2.9%, 3.5%, and 3.0%.

• Checking in on emerging markets. As noted in ourMidyear Outlook 2016 publication, emerging markets (EM)are one area that could offer potential strength and diversification during the second half of 2016. Today on the blog, we will take a closer look at EM, while focusing on the gold-to-silver ratio. This ratio has a nice track record going back 15 years at finding EM strength, and is once again flashing reasons to expect higher EM prices. Be on the lookout for this blog post later today.

Monitoring the Week Ahead

Monday

• Republican National Convention in Cleveland

Tuesday

• Housing Starts and Building Permits (Jun)
• Eurozone: ECB’s Bank Lending Survey (Q3)
• Germany: ZEW (Jul)
• IMF Releases Summer Macroeconomic Forecasts

Wednesday

• Eurozone: Consumer Confidence (Jul)

Thursday

• Initial Claims (7/16)
• Philadelphia Fed Mfg. Index (Jul)
• Eurozone: European Central Bank Meeting (No Change Expected)

Friday

• Markit PMI Mfg. (Jul)
• Eurozone: Markit Mfg. PMI (Jul)

Saturday

• G-20 Finance Ministers Meeting in China

Sunday

• Japan: Imports and Exports (Jun)

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.

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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.

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