Market Update

• Global markets slide on interest rate and monetary policy concerns. The S&P 500 is trading near flat after Friday’s sell-off, in which most sectors lost over 2%. Utilities and telecom led the decline, shedding 3.8% and 3.4%, respectively. Investors will be searching for clues to the timing of the next interest rate hikes in speeches from several potentially dovish Federal Reserve Bank (Fed) speakers today. Overnight, foreign equities started the week lower across the board as signs mount that further monetary stimulus may not be readily forthcoming. TheNikkei lost 1.7% and the Shanghai Composite shed 1.9%, while European markets are also lower, paced by a 2.2% decline in Spain’s IBEX. WTI crude oil fell below $45/barrel this morning, COMEX gold is down half a percent to $1328/oz., and the yield on the 10-year Treasury sits at 1.67%, its highest level post-Brexit.

Macro View

• Remembering 9/11. Let us all remember those who were lost on 9/11 and thank those who sacrifice to keep our country safe. We will never forget.

• Putting Friday’s big down day in perspective. The 2.5% drop for the S&P 500 on Friday was the first 1% move (up or down) in 43 days and the first 1% drop in 51 days. In fact, it was the first time in history that the S&P 500 went from being 0.5% away from a new high one day, to a fresh two-month low the next. It was the largest daily drop since the 3.6% drop due to the Brexit vote and checked in at the third largest drop of the calendar year. Lastly, the selling was so extreme (and didn’t let up) that the S&P 500 closed exactly at the intra-day lows for only the second time this entire calendar year (May 11 was the other day).

• What does a big drop on a Friday mean? The last two times the S&P 500 dropped more than 2% on a Friday saw the next Monday lose 3.9% (in August 2015) and 1.8% (the Monday after Brexit). In other words, some follow-through weakness is possible. Here is the good news: Friday has dropped more than 2% 11 times since the March 2009 lows and the following week has finished green 9 times. Today on the LPL Research blog we will take a closer look at what big drops on a Friday could mean.

• Dividend stocks led the way down on Friday. Leading the market’s decline were the dividend-oriented telecom, utilities, and real estate sectors, with losses between 3 and 4%. As we noted in last week’s Weekly Market Commentary, “Dividend Bubble?” if stocks sell off as interest rates rise on Fed rate hike fears, such as occurred during Friday’s sell-off, the high-yielding sectors may see the biggest declines. Those putting heavy emphasis on dividend stocks for income at the expense of fixed income may want to consider a more balanced approach due to the risk of a potential further increase in interest rates.

• Orderly follow-up to recent down markets. Overseas markets had an orderly decline after Friday’s big U.S. sell-off. Asian shares were down, but generally less than the U.S. market on Friday. The notable exception was Chinese shares that trade in Hong Kong in U.S. dollars and are closely tied to the global economy. Of greater note is that government bonds across the globe have sold off and interest rates have increased. For example, the German government 10-year bond now trades at a (barely) positive interest rate.

• Time to sell? It’s been a good year for stocks—the S&P 500 has returned 5.7% this year despite the drop on Friday. But has it been too good? Seven-and-a-half years into the bull market, valuations are high and we see little upside in stocks between now and year-end. Friday’s more than 1% drop for the S&P 500 was its first such drop since just after the Brexit vote on June 27, so we are due for a pullback. Add to that, September is a seasonally weak month. All of that begs the question, “Is it time to sell?” which we tackle in this week’s Weekly Market Commentary.

• We do not believe high valuations are a reason to sell stocks here. Historical data indicate a weak relationship between the S&P 500 price-to-earnings ratios (PE) and subsequent one-year performance; the correlation is just -0.3. The relationship is much stronger over longer periods of time—high PE ratios have been associated with sub-par returns over subsequent 10-year periods (-0.9 correlation).

• Week ahead. Today, the focus will be on a trio of Fed speakers (Brainard, Lockhart, and Kashkari) ahead of the quiet period before the September 20-21 Federal Open Market Committee (FOMC) Fed policymakers and market participants will have plenty of U.S. data to digest this week, including the September readings on manufacturing in Philadelphia and New York, and August readings on small business sentiment, retail sales, Consumer Price Index (CPI), and industrial production. Overseas, the Bank of England meeting highlights a busy week, which includes the German ZEW index for September and post-Brexit readings on retail sales, industrial production, and employment in the U.K. EU leaders will meet late in the week to discuss Brexit, and China will release August data on property prices, retail sales, fixed asset investment, and industrial production.

• A look at the Beige Book. This week’s Weekly Economic Commentary takes a look at the Fed’s latest Beige Bookand what Main Street is saying about the economy, wages, and inflation ahead of the next FOMC meeting.

Monitoring the Week Ahead

Monday

• Brainhard (Dove)
• China: Industrial Production (Aug)
• China: Retail Sales (Aug)

Tuesday

• NFIB Small Business Optimism Index (Aug)
• Fed Quiet Period Begins
• Germany: ZEW (Sept)

Wednesday

• UK: Jobless Claims (Aug)
• European Commission President Jean Claude Juncker Delivers “State of the Union” Address

Thursday

• Retail Sales (Aug)
• Philadelphia Fed Mfg. Report (Sept)
• Empire State Mfg. Report (Sept)
• UK: Bank of England Meeting (No Change Expected)

Friday

• Household Net Worth/Flow of Funds (Q2)
• EU Leaders Summit Meeting
• Russia: 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) are subject to interest rate risk and opportunity risk. If interest rates rise, the value of your bond on the secondary market will likely fall. In periods of no or low inflation, other investments, including other Treasury bonds, may perform better.

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.

To the extent you are receiving investment advice from a separately registered independent investment advisor, please note that LPL Financial LLC is not an affiliate of and makes no representation with respect to such entity.

Not FDIC/NCUA Insured | Not Bank/Credit Union Guaranteed | May Lose Value | Not Guaranteed by any Government Agency | Not a Bank/Credit Union Deposit

Securities and Advisory services offered through LPL Financial LLC, a Registered Investment Advisor

Member FINRA/SIPC
Tracking # 1-534390