Market Update

• Stocks add to gains on stimulus hopes. Global equities are again moving higher on Wednesday as traders turn optimistic about the potential for added central bank stimulus in the wake of Brexit. S. markets are poised to add to Tuesday’s strong session that saw the S&P 500 rise 1.8%; the gain was led by energy, financials, and technology, which all closed up by more than 2%. Overnight, Asian markets rose across the board, led by the Nikkei’s 1.6% gain, while many European indexes are up more than 2% in afternoon trading. Following their biggest two-day drop since 2011, Treasury yields are modestly higher with yields on the 10-year note hovering near 1.47%. Meanwhile, both WTI crude oil and COMEX gold are moving higher amid dollar weakness.

Macro View

• Pre-Brexit consumer spending, U.S. economy, growing well above tren Based on the May personal income and spending data released earlier today, real personal spending–which feeds directly into gross domestic product (GDP) as personal consumption–in the first two months of Q2 2016 is running 4% above its Q1 pace. Q1 spending was held down by a number of factors to just 1.5%, but if the 4% pace holds, spending in H1 2016 would be 3%, a very solid reading. If the 4% pace is sustained in June, consumer spending in Q2 2016 would be the third best since the end of the Great Recession and the fifth best quarter in 10 years. Based on the May spending data, Q2 GDP is tracking to between 3% and 3.5%.
• Best day in nearly four months. The S&P 500 bounced back after its worst two-day drop since August 2015 with a 1.8% gain, the best one-day gain since March 1. After going 20 days without a 1% move (up or down), the S&P 500 now has four 1% moves in a row. It hasn’t hit five in a row since a streak of six in a row in late August 2015. Today on the LPL Research blog we will take a look at where this Brexit-induced sell-off ranks and how extreme the near-term selling indeed was.
• “Black swan” signal? The CBOE Skew Index hit an all-time high of 153 yesterday. This index is used to measuretail risk in the S&P 500. When investors are willing to pay any price to be hedged, this reading will be high. Is this all-time high a warning sign of major problems to come? We will have a second blog post later today examining this event and what it could mean.
• Second phase of bank stress test results due out today after the market close. Results of the Federal Reserve Bank’s (Fed) Comprehensive Capital Analysis and Review (CCAR) will be released today, in which the banks will have their shareholder capital return plans approved or rejected. Following last week’s results in which all 33 banks passed a very onerous stress test, and the years of experience banks now have with this process, we are optimistic that nearly all, if not all, requests for dividends and share repurchases will be approved. Amid post-Brexit uncertainty, during which U.S. banks have sold off sharply, dividend increases will be welcomed by investors. We have been cautious on financials (including banks) all year, despite attractive valuations, due mostly to low interest rates and the flat yield curve; we remain cautious, even though these results are likely to provide some support.

Monitoring the Week Ahead

Wednesday

• Personal Income and Spending (May)
• Yellen (Dove)
• Fed Announces Bank Stress Test Results
• Eurozone: European Leaders Summit

Thursday

• Bullard (Hawk)
• Germany: Unemployment Change (June)
• Eurozone: CPI (June)
• China: Official Mfg. PMI (June)
• China: Caixin Mfg. PMI (June)
• Japan: Tankan Survey (Q2)
• Japan: CPI (May)

Friday

• ISM: Mfg. (June)
• Vehicle Sales (June)

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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