Market Update

• Central banks hold steady; stocks slide. Stocks continue to slide this morning after closing slightly lower yesterday, due to a sharp last hour sell-off (the Dow, S&P 500, andNasdaq all lost 0.2%) as investors digested the Federal Reserve Bank’s (Fed) decision to leave rates untouched. Overnight, the Nikkei Index tumbled over 3% to four-month lows after the Bank of Japan also left rates unchanged. European markets are down around 1% in afternoon trading and are headed for a sixth straight loss, led by a sell-off in bank stocks. The risk-off posture is back in force as COMEX gold has surged above $1310/oz. and the yield on the 10-year Treasury is at 1.56%. Elsewhere, WTI crude oil continues to retreat toward its 50-day moving average, approaching $47/barrel.

Macro View

• Fed stands pat, takes down dot plots, sounds dovish.At the conclusion of its two-day policy meeting yesterday, the Federal Open Market Committee (FOMC) continued to stress that any future rate hikes were data dependent, and that if its forecast for the economy, labor market, and inflation are achieved, it will raise rates two more times this year. However, the Fed’s so called “dot plots” now show just three rate hikes next year (down from four baked in at the March 2016 FOMC meeting), and the long run fed funds rate is now 3.0%, down from 3.25% in March. In general, while Fed Chair Janet Yellen stressed that every meeting is a “live meeting” and that future rate hikes are data dependent, we and the market viewed yesterday’s FOMC meeting as dovish. We continue to expect two more rate hikes this year.

• New claims for unemployment rose 13,000 to 277,000 in the week ending June 11, as claims stabilize near 40-year lows after recent distortions. More distortions loom, however, as the end of the school year and the annual auto plant shutdowns are on the horizon. Claims are up 2,000 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. The level of claims continues to point to a solid labor market, but we will continue to watch it closely.

• May CPI not enough to convince the Fed to raise rates in July. The Consumer Price Index (CPI) posted a weaker than expected 0.2% month-over-month increase in May–the consensus expected a 0.3% gain–and was up 1.0% from a year ago. CPI excluding food and energy (core CPI) rose 0.2% month over month and 2.2% from a year ago. Beneath the surface, CPI for services (two-thirds of CPI) rose 2.9% year over year, at the upper end of its recent range. CPI for commodities (one-third of CPI) fell 2.0% year over year; but if oil and gasoline prices stay in their recent range, CPI for commodities will turn positive in the second half of 2016 and push overall CPI close to 2%.

• The Bank of Japan kept policy steady at its meeting yesterday. The expectations are that the Bank of Japan will increase its quantitative easing policy and purchase additional Japanese securities, both stocks and bonds, by the end of this year. Expectations for policy changes at this meeting were low; however, the yen appreciated and stocks declined after the announcement.

• Down five in a row. The S&P 500 dropped hard during the final half hour of trading yesterday to close lower for the fifth consecutive day. The last time it closed in the red five straight days was during the February lows. It hasn’t been down six days in a row since August 2015, and the last time it hit seven in a row was November 2011. The good news is, the last two times it was down five days in a row (February 2016 and September 2015), five days later it was higher by 4.8% and 5.6%, respectively. Today on theblog we will take a closer look at five-day losing streaks.

• Worry is climbing. The recently released American Association of Individual Investors (AAII) sentiment poll showed a big spike in bears. In fact, it was up to 37.5%, the most in 17 weeks (mid-February). Also worth noting is that those who voted neutral moved to 37.2%, the first time the neutral group was below 40% in 13 weeks. With all of the uncertainty and concern regarding the upcoming Brexit vote, this poll shows investors’ worries might be increasing as well. Remember, from a contrarian point of view, a surge in bearish sentiment could be a positive development.

Monitoring the Week Ahead

Thursday

• Philadelphia Fed Index (Jun)
• CPI (May)
• NAHB Housing Market Index (Jun)
• UK: Retail Sales (May)
• Japan: Bank of Japan Meeting (No Change Expected)
• UK: Bank of England Meeting (No Change Expected)

Friday

• Housing Starts (May)
• Mario Draghi Speech in Munich
• China: Property Price Indexes (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.

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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