Market Update

• Investors take stock of Fed meeting and earnings; Treasuries rally. The S&P 500 and Dow finished near flat on Wednesday as markets evaluated a slightly less dovishtone from the Federal Reserve Bank (Fed). In equities, technology (+0.7%) was the best performing sector, while consumer staples, utilities, and energy all lost over 1%. The Nasdaq is higher this morning as the tech sector looks poised to outperform thanks to an earnings and revenue beat from Facebook. Strength returned to the Treasurycomplex yesterday following the Fed statement, although the yield on the 10-year note has ticked higher this morning to 1.53%. Overseas, the Nikkei Index lost 1.1% ahead of the Bank of Japan meeting, and the Shanghai Composite closed flat. In late trading, European shares are mixed, though largely unchanged. Meanwhile, WTI crude oil continued to fall yesterday after a surprise build in inventories, trading around $42/barrel, and COMEX gold is back above $1340/oz.

Macro View

• FOMC upgrades economy but doesn’t hint at a September hike. As expected, the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), decided to keep rates unchanged at the conclusion of its two-day meeting. With no press conference from Fed Chair Janet Yellen and no new set of economic forecasts or “dot plots” from FOMC members, this meeting was all about the statement. The FOMC upgraded its assessment of the economy versus the June statement, and noted that “near-term risks to the economic outlook have diminished.” However, the statement also used the phrase “monitor inflation indicators and global economic and financial developments” again, as it has in every FOMC statement this year, including twice in the March 2016 statement. Importantly, the Fed did not drop any hints that a September rate hike was on the table. Please seeyesterday’s post on the LPL Research blog for more detail.

• Post-Brexit data point: initial claims. At 266,000, new claims for unemployment insurance remained at 40-year lows in the week ending July 23, 2016. The latest report is another indicator that the labor market post-Brexit is little changed from pre-Brexit; but as usual, the weekly claims data are beset by distortions. At this time of the year, the end of the quarter/start of a new quarter and the annual auto plant shutdowns are the likely culprits. Claims are down 9,000 from their level 26 weeks ago. In the past, claims need to rise more than 75,000 over a six-month (26-week) period to indicate a recession, so clearly there is no recession signal from claims.

• Merchandise trade gap widens more than expected in June. The U.S. imported $63.3 billion more goods than it exported in June. The $63.3 billion trade gap was wider than expected ($61 billion) and wider than the $61 billion trade deficit in May. The U.S. has imported more goods than it exports in every month since April 1982, but runs a large trade surplus on the services side. The wider than expected trade deficit in June will likely knock a few tenths off of Q2 gross domestic product (GDP) estimates, which are hovering near 3% after the 1.1% reading in Q1. The GDP data for Q2 are due out tomorrow morning. TheBureau of Economic Analysis, the U.S. government agency that compiles the GDP data, will also release revised data for GDP and its components dating back to 2013, as it does every year at this time.

• A good couple days. Earnings results have had a good couple of days, and we have actually seen S&P 500 estimates for the current quarter (Q3) inch a tiny bit higher–a rarity in this cycle–with forward estimates falling less than usual. More relatively good news: The earnings beat rate has jumped to an excellent 72%, while revenue surprises have lifted second quarter revenue up into positive territory–a solid upside surprise of almost 1%.

• More of the same. We’ve been noting how tight the range has been lately in equities, and yesterday the S&P 500 lost 0.1% to keep the small range going. Over the past 11 days, the S&P 500 has traded in a range of only 1.37%, which has only happened 3 other times since 2000–that most recent time was September 2014. Incredibly, the S&P 500 hasn’t moved more than 0.5% (up or down) for nine straight days. That has only happened 7 other times the past 20 years. The slight drop yesterday has now made it 10 consecutive days that the S&P 500 has alternated between higher and lower closes. Going back to 1928, this is only the 12th time that the S&P 500 has alternated between higher and lower closes for 10 straight days.

Monitoring the Week Ahead

Thursday

• Initial Claims (7/23)
• Germany: Unemployment Change (Jul)
• Germany: CPI (Jul)
• Japan: Jobless Rate (Jun)
• Japan: CPI (Jun)
• Japan: Tokyo CPI (Jul)
• Japan: Industrial Production (Jun)
• Japan: Retail Sales (Jun)

Friday

• GDP (Q2 and Revisions to Data from 2013 – 2016)
• Chicago Area PMI (Jul)
• Eurozone: GDP (Q2)
• UK: Money Supply and Bank Lending (Jun)
• Eurozone: CPI (Jul)
• Japan: Bank of Japan Meeting
• Mexico: GDP (Q2)

Sunday

• China: Official Mfg. PMI (Jul)
• China: Official Non-Mfg. PMI (Jul)
• China: Caixin Mfg. PMI (Jul)

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.

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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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