Market Update

• Stocks rising ahead of Yellen speech. U.S. stocks are tracking higher to start the week, as investors await a speech from Federal Reserve Bank (Fed) Chair Janet Yellen following Friday’s surprisingly weak jobs report. Yellen’s comments have the potential to provide some direction to a market that spent all of last week right around the key 2,100 level on the S&P 500. Overnight, Asian markets finished mixed with the Nikkei Index hitting a four-week low; while in afternoon trading, European markets are flat to slightly positive. COMEX gold is moving higher again, following Friday’s 2.5% jump that was the largest one-day increase since mid-March; WTI crude oil is back above $49/barrel; and bonds are giving up some of last week’s gains, which saw the yield on the 10-year Treasury fall from 1.85% to 1.70%.

Macro View

• Week ahead. A 12:30 p.m. ET speech by Fed Chair Yellen in Philadelphia today will hopefully provide markets with the Fed’s assessment of the soft May jobs report and an update on the future path of rates. As is often the case the week after the jobs report, U.S. economic data are quiet; but China will begin to release its May dataset throughout the week and there are several key reports due out in Japan as well, including the May Economy Watchers Survey. There are more than a half-dozen central bank meetings, including in Russia, Poland, Brazil, South Korea, New Zealand, and Australia, but the only change expected is a rate cut in New Zealand. Please see our Weekly Global Economic & Policy Calendar for details.

• Latest Beige Book. In this week’s Weekly Economic Commentary, due out later today, we examine the Fed’s latest Beige Book, released on June 1, 2016, ahead of the June 14-15 Federal Open Market Committee (FOMC)Inflation words are on the rise in recent Beige Books, but mentions of a strong dollar have waned. Oil production continues to weigh on economic conditions in the energy-producing states and Main Street has remained broadly optimistic, although pessimism is running high in the energy-producing states.

• A look at the GAAP gap. Currently, a wide gap exists between reported earnings and operating earnings for S&P 500 companies. Some have tried to make a cause-effect relationship between this earnings divergence and bear markets, a connection we find extremely weak. In this week’s Weekly Market Commentary, due out later today, we dig a little deeper into this issue and make the case that it should not be of much concern to investors.

• May jobs report redux. Given the lack of other economic, policy, and earnings news this morning, markets will continue to focus on last Friday’s May Employment Report. Was the report a sign that a recession is right around the corner? Or, was it “payback” for a warmer than usual winter, which saw job growth average 239,000 per month (well above trend) in the six months ending in March 2016? Our view is that it was somewhere in between, and our long-held view remains that by the end of 2016, monthly job gains–which have consistently averaged 200,000+ per month for six years–will slow to the 150,000 per month range, which is still strong enough to tighten the labor market and push up wages and inflation.

• Smallest weekly gain ever. Last week saw the smallest weekly gain for the S&P 500 ever at just 0.0033%. The previous record was 0.0061% in July 2014. Nonetheless, the S&P still gained for the third consecutive week. Incredibly, the S&P 500 has closed at 2,099 three times in the past five days, as the 2,100 level continues to act as strong resistance—just as it has been for the past 16 months.

• S&P 500 up three straight months. The S&P has gained for three consecutive months for the first time since June 2014. The good news is the near-term performance after three consecutive higher months is actually stronger than the average return. Since 1960, the S&P 500 has gained for three consecutive months 142 times, and the average returns three and six months later are 2.6% and 5.0%, respectively. Both are above the average three- and six-month returns of 1.9% and 3.9%. Today on the blog we will take a closer look at this development.

Monitoring the Week Ahead

Monday:

• Yellen (Dove)

Tuesday:

• FOMC Quiet Period Begins
• India: Reserve Bank of India Meeting (No Change Expected)
• China: Imports and Exports (May)

Wednesday

• JOLTS (Apr)
• Brazil: Central Bank Meeting (No Change Expected)
• China: CPI (May)
• Japan: Economy Watchers Survey (May)

Thursday

• Flow of Funds (Q1)
• ECB’s Draghi Speaks in Brussels
• China: Money Supply and New Loan Growth (May)

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.

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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.

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

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