Market Update

• Global markets continue to rally as S&P 500 breaks out to new highs. After nearly 14 months, the S&P 500finally broke through and set a new all-time closing high on Monday, and equities are continuing the momentum this morning. Technology led the way up for the major averages, while healthcare, telecom, and utilities all closed slightly lower on the day. Overnight, Asian equities finished markedly higher, once again led by Japan’s Nikkei, which moved up 2.5% amid continued stimulus hopes and a weakening yen; while in Europe, stocks are rising for the fourth straight session. Treasuries are dropping sharply for a second day with the yield on the 10-year Note moving back up to 1.49% after closing at a record low on Friday. Meanwhile, the dollar and COMEX gold are falling, while WTI crude oil is up over 2% near $46/barrel.

Macro View

• Overseas conditions still supportive of near-record low Treasury yields. Treasury yield advantages to both German and Japanese government bonds remain near their widest levels of the past three years. So despite recent Treasury strength, which saw the 10-year Treasury yield drop to a new all-time record low of 1.36% on July 8, 2016, valuations relative to overseas counterparts remain attractive. The yield advantage of the 10-year Treasury compared to German and Japanese counterparts stands at 1.6% and 1.7%, respectively.
• Yield curve flattens further as investors reach for longer-term bonds. Yield curve steepness, as measured by the difference between the 10- and 2-year Treasury yield, continued its recent leg lower last week, closing at a post-recession low of 0.76%. The bond market continues to send a message of slower long-term growth, though not a recession, given that the spread between 2- and 10-year Treasuries is still in positive territory.
• Municipal bonds trail Treasuries. Municipal bonds lagged Treasuries for a second straight week. Municipal yields declined but at a slower rate than those of comparable Treasuries. The average AAA 30-year yield fell to a new all-time low of 2.1%, while 10-year yields remain near the 1.3% low set during the last week of June. Average AAA 10- and 30-year municipal-to-Treasury ratios moved higher to 98% and 100% respectively, up from multi-year lows. Valuations remain near only the middle of their recent range.
• Puerto Rico default update. Puerto Rico’s default pushed up the dollar amount of municipal defaults significantly; however, ex-Puerto Rico, municipal defaults total $600 million versus $1.9 billion over the same period in 2015. The municipal market has taken the anticipated default in stride. Outside of Puerto Rico, defaults remain very limited and are declining on a year-over-year basis. Low defaults are supportive of high-yield municipal bonds overall, butyield spreads have narrowed significantly over the past 12 months and largely reflect that outcome.
• New all-time highs for the S&P 500. The S&P 500 closed at an all-time high yesterday for the first time since May 21, 2015. Since the S&P 500 first broke out to a new high in March 2013, this was the 109th new high of this bull market cycle. There were 45 new highs in 2013, 53 in 2014, 10 last year, and 1 so far in 2016. The recent streak without a new high was 14 months. Going back to 1950, there have been 13 previous times the S&P 500 went more than year before making a new all-time high. The good news is that the returns after are rather strong, up 7.3% six months later and up 14.0% a year later. In fact, a year later the S&P 500 has been higher 12 out of those 13 times.
• Alcoa reiterates global demand forecast. We find Alcoa’s comments on global metal demand outlook interesting because they are typically the first global multinational S&P 500 company to report results. Alcoa reiterated its 5% forecast for 2016 global aluminum demand, and its 6.5% forecast for Chinese aluminum demand. The company made no mention of Brexit while currency headwinds, as expected, had limited impact. Overall, this earnings season, we do not expect political uncertainty in the U.K. or currency translation to have a meaningful impact on results.

Monitoring the Week Ahead

Tuesday

• NFIB Small Business Optimism Index (Jun)
• JOLTS (Jun)
• Bullard (Hawk)
• UK: Bank of England’s Carney Speaks on Financial Stability to Parliament

Wednesday

• Beige Book
• Kaplan (Hawk)
• Canada: Bank of Canada Meeting (No Change Expected)
• China: Imports and Exports (Jun)

Thursday

• Initial Claims (7/9)
• UK: Bank of England Meeting (Rate Cut Expected)
• China: GDP (Q2)

Friday

• Retail Sales (Jun)
• CPI (Jun)
• Empire State Mfg. Index (Jul)
• Consumer Sentiment and Inflation Expectations (Jul)

Sunday

• China: Property Prices (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.

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.

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