Market Update

• Market continues search for direction. Equities are near flat to start the day, following yesterday’s slight advance and yet another day of alternating positive and negative closes. Wednesday’s session was highlighted by a strong bounce in utilities (+1.5%) and underperformance of the consumer discretionary and materials sectors. Overnight, the Nikkei fell 1.6% after reporting disappointing trade data, while the Shanghai Composite ticked lower by 0.2%. In afternoon trading, European markets are flat amid mixed economic data and continued earnings releases. Meanwhile, the dollar is slipping following less hawkishthan expected Federal Open Market Committee (FOMC)minutes, WTI crude oil ($47.50/barrel) and COMEX gold ($1355/oz.) are moving higher, and the yield on the 10-year Treasury is down 0.01% to 1.55%.

Macro View

• Fed minutes show internal disagreement, but reveal little that is new. The minutes from the Federal Reserve Bank’s (Fed) July 26-27 policy meeting, released Wednesday at 2:00 p.m. ET, highlighted some improvement in U.S. economic data and revealed an active internal debate on the prospects for inflationary pressures and the significance of slower global growth. The main takeaway was a continued emphasis on data dependency, also known as “wait and see.” With little explicit support for a September hike and the possibility of lowered long-term expectations, the 10-year Treasury yield fell modestly in response to the release. We continue to see a December rate hike as the most likely scenario based on some continued improvement in labor markets, a rebound in U.S. growth from early-year doldrums, and the impact of some wage pressure and stabilizing oil prices on inflation.

• Initial claims remain low. At 262,000, new claims for unemployment insurance remained near 40-year lows in the week ending August 13, another reminder that the labor market post-Brexit is little changed from pre-Brexit. Claims are up only 2,000 from their level 26 weeks ago, indicating very low likelihood the economy is in recession. In the past, claims needed to rise more than 75,000 over a six-month (26-week) period to indicate a recession.

• No Brexit impact yet. Despite concerns and sentiment surveys, U.K. sales gained more than expected, up 5.4% versus the 3.9% forecast. Other data, such as jobless claims and weekly earnings, also came in at or above expectations. The main impact of Brexit is years in the future, though some impacts will likely be felt sooner. While sentiment data have been poor, actual consumer behavior seems yet to be impacted.

• Yen strength, economic weakness. The Japanese yen has strengthened over the past month and has now crossed the 100 yen/dollar ratio; given the way the yen is quoted, the ratio getting lower indicates yen strength. The impact of the stronger yen was seen in recently released trade balances. Exports declined 14% over the past year, worse than expected and below the 7.4% previous annual decline. Imports, a sign of the health of the Japanese economy, declined by 24.7% on an annual basis.

• Where did the August volatility go? August historically has been one of the most volatile months; however, 2016 isn’t following that script very well. Going back to 1950, 20.6% of all days in August have moved at least 1% (up or down), with only October and November higher. So far this year, not one single day this month has moved 1%. In fact, the past 28 days have moved less than 1%–the longest streak since 32 days nearly two years ago. Today on the LPL Research blog we will take a look at what a non-volatile August could mean for the rest of the year.

• Alternating streak continues. The S&P 500 was up slightly yesterday, to extend the streak of alternating between higher and lower closes to 9 straight days–for only the 25th time since 1950. Interestingly, 4 of those 25 have taken place in the past 2 years. The last 2 times it made it to 9 straight, the streak kept going to 11 and 13. The all-time record was 14 days alternating between higher and lower in early 2013.

Monitoring the Week Ahead

Thursday

• Philadelphia Fed Mfg. Report (Aug)
• Eurozone: Minutes of July ECB Meeting Released

Friday

• Indonesia: Central Bank Meeting (Rate Cut Expected)

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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