Monthly Archives: February 2017

Market Insights 2/28/2017

Markets Finish Lower Ahead of Trump’s Speech

U.S. equities finished lower, as investors await tonight’s highly-anticipated Congressional speech by President Donald Trump. Political uncertainty took center stage, with a more than 15-year high in Consumer Confidence and stronger-than-expected regional manufacturing activity taking a back seat.

Treasuries were mixed, gold and crude oil prices were modestly lower, while the U.S. dollar was flat.

The Markets…

The Dow Jones Industrial Average (DJIA) fell 25 points (0.1%) to 20,812,

The S&P 500 Index declined 6 points (0.3%) to 2,363, and

The Nasdaq Composite decreased 36 points (0.6%) to 5,825.

In heavy volume, 1.2 billion shares were traded on the NYSE and 2.2 billion shares changed hands on the Nasdaq.

WTI crude oil inched $0.04 lower to $54.01 per barrel and wholesale gasoline lost $0.01 to $1.73 per gallon. Elsewhere,

The Bloomberg gold spot price declined $3.20 to $1,249.53 per ounce, and

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was little changed at 101.15.

For the month, the Dow Jones Industrial Average was higher by 4.77%, the S & P 500 advanced 3.87% and the NASDAQ gained 4.29%

First revision to Q4 GDP unchanged, while Consumer Confidence hits multi-year high

The second look (of three) at Q4 Gross Domestic Product, the broadest measure of economic output, showed a quarter-over-quarter annualized rate of growth of 1.9%, unrevised from the first release. The Bloomberg forecast called for an adjusted 2.1% pace of expansion. 3Q GDP grew by an unrevised 3.5% rate. Personal consumption came in at a 3.0% gain for Q4, up from the preliminary estimate of a 2.5% increase, and compared to the expectations of a 2.6% increase. Personal consumption grew by an unrevised 3.0% in Q3. The unchanged revision came as the upward adjustment to personal consumption was met with a downward revision to business investment.

On inflation, the GDP Price Index was revised to a 2.0% gain, versus forecasts of an unrevised 2.1% increase, while the core PCE Index, which excludes food and energy, was adjusted to a 1.2% rise, compared to expectations of an unrevised 1.3% gain.

The Consumer Confidence Index rose to 114.8 in February—the highest level since July 2001—from the downwardly revised 111.6 level in January, and compared to estimates of 111.0. Sentiment toward the present situation and expectations of business conditions for the next six months both improved. On employment, the labor differential—consumers’ appraisal of jobs being “plentiful” minus being “hard to get”—dipped to 5.9 from the 6.0 posted in January.

The Chicago Purchasing Managers Index moved further into a level depicting expansion (above 50), after rising to 57.4 in February—the highest level since January 2015—from 50.3 in January, and versus expectations of a gain to 53.5.

The advance goods trade deficit rose to $69.2 billion in January, from the downwardly revised $64.4 billion in December, and compared to expectations of it to widen to $66.0 billion.

The 20-city composite S&P CoreLogic Case-Shiller Home Price Index showed a 5.6% gain in home prices y/y in December, versus expectations of a 5.4% increase. Month-over-month (m/m), home prices were up 0.9% on a seasonally adjusted basis for December, above forecasts calling for a 0.7% gain.

The Richmond Fed Manufacturing Activity Index unexpectedly moved further into expansion territory (a reading above zero), rising to 17 for February from the 12 posted in January, and versus expectations of a 10 reading.

Treasuries finished mixed, as the yield on the 2-year note was 2 basis points (bps) higher at 1.22%, the yield on the 10-year note was flat at 2.36%, while the 30-year bond declined 2 basis points to 2.97%.

Along with the host of data today, the markets continue to focus on cooled off post-election rallies in the U.S. dollar and Treasury yields, along with all-time high stock markets. Political risk in the U.S. and Europe has tempered conviction. As such, the global markets are likely anticipating tonight’s speech in front of Congress by President Donald Trump, looking for details regarding his tax and regulatory reforms, along with infrastructure spending plans that have teamed up with recent solid economic data to fuel the rallies in the stock and bond markets and the greenback since the November election.

Europe higher, Asia mixed as markets eye Presidential speech in U.S.

European equities nudged higher, despite festering global political uncertainty ahead of looming key elections in France and tonight’s Congressional speech from U.S. President Donald Trump. French Q4 GDP growth came in at a 1.2% y/y pace, topping forecasts of 1.1%, while shares of Meggitt PLC. jumped after the U.K. defense and energy engineer’s earnings report topped expectations. Spanish stocks were noticeable gainers, bolstered by travel-related issues and solid gains in the financial sector. The euro ticked higher and the British pound declined versus the U.S. dollar, while bond yields in the region finished mixed.

Stocks in Asia finished mixed with the global markets cautiously awaiting tonight’s Congressional speech from U.S. President Trump, amid the backdrop of heightened political uncertainty on both sides of the Atlantic. Moreover, a plethora of data was released today, ahead of this week’s global reads on manufacturing and services sector activity. Japanese equities ticked higher, giving up early gains late in the session as the yen reversed losses. Japan reported an unexpected drop in industrial production for January, though its retail sales rose more than expected m/m for last month. Chinese stocks diverged to cap off this month’s rally, with those traded in Hong Kong falling, while mainland Chinese equities advanced, with the nation set to report its manufacturing and services PMIs tonight. Strength in oil & gas issues was met with weakness in other sectors to lead a decline in Australia’s markets, while South Korean securities rose, but Indian listing declined ahead of its 4Q GDP report. After the closing bell, India’s 4Q GDP growth decelerated to a 7.0% y/y pace, from 7.4% expansion in 3Q, and compared to expectations of a 6.1% gain.

Manufacturing PMI reads from across the globe will dominate tomorrow’s international economic calendar, while other reports slated for release include South Korea’s trade balance, and CPI from Germany.

Market Insights 2/27/2017

Markets Indifferent to Start the Week

U.S. equities spent most of the day, nearly unchanged, then finishing with modest gains, with tomorrow’s speech to Congress by President Donald Trump appearing to keep conviction in check.

Equity news was in short supply, but the economic calendar showed durable goods orders and pending home sales missed estimates, while another read on regional manufacturing activity hit a multi-year high.

Treasury yields and crude oil prices ticked higher, while gold was lower and the U.S. dollar was little changed.

The Markets…

The Dow Jones Industrial Average rose 16 points (0.1%) to 20,837

The S&P 500 Index added 2 points (0.1%) to 2,370

The Nasdaq Composite gained 17 points (0.3%) to 5,862

In moderate volume, 834 million shares were traded on the NYSE and 1.8 billion shares changed hands on the Nasdaq

WTI crude oil inched $0.06 higher to $54.05 per barrel and wholesale gasoline was unchanged at $1.74 per gallon

The Bloomberg gold spot price declined $5.83 to $1,251.36 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was flat at 101.13

Core durable goods orders miss, while regional manufacturing activity hits multi-year highs

January preliminary durable goods orders rose 1.8% month-over-month, compared to the Bloomberg estimate of a 1.6% rise and December’s downwardly revised 0.8% decline. Ex-transportation, orders declined 0.2% m/m, compared to forecasts of a 0.5% gain and versus December’s upwardly revised 0.9% increase. Orders for non-defense capital goods excluding aircraft, considered a proxy for business spending, decreased 0.4%, versus projections of a 0.5% increase, and following the favorably revised 1.1% increase in the month prior.

The Dallas Fed Manufacturing Activity Index unexpectedly rose further into a level depicting expansion (a reading above zero), increasing to 24.5 in February—the highest level since April 2006—from 22.1 in January, and compared to the expected dip to 19.4.

Pending home sales fell 2.8% m/m in January, versus projections of a 0.6% gain, and following the downwardly revised 0.8% increase registered in December. Compared to last year, sales were 2.7% higher. Pending home sales reflect contract signings and are used as a gauge of the pipeline of existing home sales, which rose more than expected in January to the fastest pace since February 2007.

Today’s data kicks off a fully-loaded economic docket for the week, as the markets grapple with the possibility of a March Fed rate. Tomorrow will be one of the heaviest days, with reports slated for release to include the second look (of three) at 4Q GDP, with economists expecting the headline figure to be revised higher to a 2.1% quarter-over-quarter annualized expansion from the 1.9% posted in the first report, and personal consumption to tick higher to 2.6% from the 2.5% initially recorded, while the report’s inflation figures are expected to remain the same. As well, the advanced goods trade balance is forecasted to show that the deficit widened to $66.0 billion in January from $65.0 billion the month prior, and Consumer Confidence will be released, forecasted to move to a level of 53.5 for February from the 50.3 registered in January. Rounding out the day will be the Chicago Purchasing Manager’s Survey, the Richmond Fed Manufacturing Index, and the S&P CoreLogic Case-Shiller Home Price Index. Also, President Donald Trump will deliver his speech in front of Congress tomorrow evening.

Treasuries were lower, as the yields on the 2-year and 10-year notes rose 5 basis points (bps) to 1.20% and 2.37%, respectively, while the 30-year bond rate gained 3 bps to 2.98%.

Treasury yields and the U.S. dollar remain in focus, with the stock markets remaining near all-time highs, amid festering political and monetary policy uncertainty, along with signs that the economy continues to gain momentum. As noted previously, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here.

Europe ticks higher despite political uncertainty, Asia sees declines to begin the we
ek

European equities nudged higher, shrugging off festering political concerns and a possible thwarted merger agreement among some key exchanges. The British pound overcame early pressure that stemmed from a report from the London Times which suggesting that another Scottish independence vote could be in the offing. The news came amid heightened political risk in the U.S. and Europe with the former dealing with high expectations of promised reflationary policy pledges and the latter facing a looming key French Presidential election. However, Italian political uneasiness cooled off after former Prime Minister Renzi suggested he will not push for early elections.

It appear the stock market sees nothing to worry about—that may be about to change. Europe’s economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. In economic news, Eurozone economic confidence improved modestly but slightly missed expectations for February. The euro traded higher versus the U.S. dollar and bond yields in the region were mixed.

Asian stocks finished lower with the global market rally pausing amid continued U.S. and European political uncertainty, while data was on the light side. Japanese equities dropped, with the yen remaining choppy after a recent rebound, while Australian securities also declined. Stocks in mainland China and those traded in Hong Kong Hang cooled from rallies as of late, both finishing lower, and India’s markets declined in its return to action following Friday’s holiday break, while South Korean listing also lost ground.

Tomorrow’s international economic calendar will be somewhat busy, with reports scheduled for release to include industrial production, construction orders, housing starts and retail sales from Japan, new home sales and business confidence from Australia, consumer confidence from the U.K., GDP and CPI from France, and CPI from Italy.

Market Insights 2/24/2017

Markets Rally to the Finish

U.S. equities rallied in the final minutes of the week to finish in the green after spending most of the day lower, as investors mulled a mixed bag of earnings and economic data, as well as growing domestic and European political risk.

Treasury yields extended a decline, and crude oil prices lost ground, while gold and the U.S. dollar were higher.

News on the equity front continued to surround earnings reports, while economic reports showed that new home sales missed forecasts and consumer sentiment topped expectations.

The Markets..

The Dow Jones Industrial Average rose 11 points (0.1%) to 20,822

The S&P 500 Index added 4 points (0.2%) to 2,367

The Nasdaq Composite gained 10 points (0.2%) to 5,845

In moderately-heavy volume, 932 million shares were traded on the NYSE and 1.7 billion shares changed hands on the Nasdaq

WTI crude oil was $0.46 lower at $53.99 per barrel and wholesale gasoline lost a penny to $1.74 per gallon

The Bloomberg gold spot price rose $8.23 to $1,257.79 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.1% higher at 101.13

Markets were higher for the week, as the DJIA increased 1.0%, the S&P 500 Index advanced 0.7%, and the Nasdaq Composite ticked 0.1% higher

New home sales miss, while consumer sentiment revised higher than expected

New home sales rose 3.7% month-over-month in January to an annual rate of 555,000, below the Bloomberg forecast of 571,000 units, and compared to the downwardly revised 535,000 unit pace in December. The median home price was up 7.5% y/y to $312,900. New home inventory remained at a 5.7 months’ supply at the current sales pace. Sales declined m/m in the West, but rose in the Northeast, Midwest and South. New home sales are based on contract signings instead of closings.

The final February University of Michigan Consumer Sentiment Index was revised to 96.3 from the preliminary level of 95.7, above estimates calling for an adjusted 96.0 reading. The index was down compared to January’s level of 98.5, which was the highest since January 2004. Compared to January, the expectations component declined, while the current conditions component ticked higher. The 1-year inflation outlook dipped to 2.7% from January’s 2.8% rate, and the 5-10 year inflation projection remained at 2.5%.

Treasuries were higher, as the yield on the 2-year note decreased 5 basis points (bps) to 1.14%, while the yields on the 10-year note and the 30-year bond dropped 6 bps to 2.31% and 2.95%, respectively. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here.

Europe lower on earnings and political uncertainty, Asia lower

European equities lost ground, with the Stoxx Europe 600 Index pulling back from a 14-month high, as a plethora of earnings reports weighed on sentiment and the global markets took a breather from a recent surge. U.S. and European political uncertainty continued to fester to foster the pullback in the markets, with the former dealing with high expectations of promised reflationary policy pledges and the latter facing a looming key French Presidential election.

The stock market sees nothing to worry about—that may be about to change- Europe’s economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months. The euro was little changed and the British pound declined versus the U.S. dollar, while bond yields in the region finished lower.

Stocks in Asia finished mostly lower as the recent global market rally pauses amid heightened political uncertainty in the U.S. and Europe. Japanese equities declined, with the yen extending an advance as of late, while basic materials weighed on Australian securities. Stocks in South Korea and Hong Kong fell, while those traded in mainland China bucked the trend and modestly higher. Markets in India were closed for a holiday.

Stocks higher in the shortened week, Dow notches more record highs

The major U.S. equity markets finished out the week near record highs in choppy action, as the global markets grappled with the timing and details of promised reflationary policy pledges in U.S., while a looming key French Presidential election fostered uneasiness. The U.S. Dollar Index finished little changed. Financials, which have helped lead the post-election surge, dipped as Treasury yields pulled back, leading to a rally in utilities. Bond yields lost ground despite the minutes from the Fed’s most recent policy meeting suggesting a March rate hike remained on the table.

The retail sector came into focus as mixed earnings reports poured in, highlighted by Dow members Wal-Mart Stores Inc. and Home Depot Inc., though a severely softer-than-expected outlook from L Brands Inc. hammered its stock. Tesla Inc. also came under pressure after posting a larger-than-expected loss. With earnings season winding down, of the 461 companies that have reported out of the S&P 500, about 73% have topped earnings estimates, while roughly 52% have exceeded sales projections, per data compiled by Bloomberg.

With the possibility of a March Fed rate hike on the table comes a fully-loaded economic calendar for next week, headlined by national manufacturing and services sector reads by the ISM and Markit, durable goods orders, the second look (of three) at Q4 GDP, along with personal income and spending. Also, the week will conclude with Federal Reserve Chairwoman Janet Yellen’s economic outlook speech in Chicago.

In addition to a plethora of global manufacturing and services reports, other international reports due next week include: Australia—Q4 GDP and trade balance. India—Q4 GDP. Japan—Household spending, consumer price inflation (CPI), industrial production, retail sales and Q4 capital spending. Eurozone—CPI, unemployment rate and retail sales. U.K.—Consumer confidence.

Market Insights 2/23/2017

Investors Remain Uncertain

U.S. equities finished mixed for a second-straight day, with the Dow continuing to add to its record run, as investors weighed lingering political risks in the U.S and Europe, March Fed rate hike uncertainty and continued signs of solid economic activity.

Treasury yields and the U.S. dollar were lower, and gold gained ground, while crude oil prices were higher, courtesy of bullish oil inventory reports.

The Markets…

The Dow Jones Industrial Average increased 35 points (0.2%) to 20,810

The S&P 500 Index inched 1 point higher to 2,364

The Nasdaq Composite fell 25 points (0.4%) to 5,826

In moderately-heavy volume, 927 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil gained $1.06 to $54.45 per barrel and wholesale gasoline added $0.02 to $1.75 per gallon

The Bloomberg gold spot price increased $11.44 to $1,248.88 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 101.01

Jobless claims rise

Weekly initial jobless claims rose by 6,000 to 244,000 last week, above forecasts of 240,000, with the prior week’s figure being revised lower to 238,000. The four-week moving average fell by 4,000 to 241,000, while continuing claims declined by 17,000 to 2,060,000, south of estimates of 2,068,000.

The Kansas City Fed Manufacturing Activity Index for February rose to 14, from January’s 9 reading, where it was forecasted to remain, with a level north of zero depicting expansion.

Treasuries were higher, as the yields on the 2-year and 10-year notes dropped 4 basis points to 1.18% and 2.38%, respectively, while the 30-year bond rate dipped 2 bp to 3.02%.

Stocks remain near all-time highs, while the U.S. dollar has rallied and Treasury yields are holding strong post-election gains, courtesy of continued upbeat economic data and optimism of a mix of fiscal stimulus being delivered by President Donald Trump. However, these markets have cooled modestly as of late amid domestic and European political risk, along with Fed Chair Janet Yellen’s Congressional testimony last week and yesterday’s minutes from the Fed’s recent meeting that have kept a March rate hike on the table.

As noted previously, elevated earnings and economic expectations could lead to a pullback or more sideways action but we believe the bull market in U.S. stocks will continue. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here.

The week’s economic calendar will culminate tomorrow with the releases of new home sales, with economists expecting a 7.5% month-over-month increase during January to a level of 576,000 units, as well as the final February University of Michigan Consumer Sentiment Index, forecasted to tick higher to a level of 95.8 from the preliminary figure of 95.7, but below the 98.5 posted in January.

Europe dips on data and political uncertainty, Asia mixed

European equities finished mostly lower, with the markets digesting diverging earnings and economic data, along with late-yesterday’s release of the U.S. Fed meeting minutes that suggested a March rate hike remains on the table. Also, political risk in the U.S. and Europe remained, with traders grappling with the former’s uncertainty regarding potential reflationary policy pledges and the latter’s looming key election in France.

The stock market sees nothing to worry about—that may be about to change. Jeff notes that Europe’s economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. He concludes that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months.

In economic news, German 4Q GDP growth matched forecasts, French manufacturing confidence topped expectations, U.K. retail sales bested forecasts, and Italian retail sales unexpectedly fell. The euro and British pound moved higher versus the U.S. dollar, while bond yields in the region finished mixed.

The U.K. FTSE 100 Index, Germany’s DAX Index and Italy’s FTSE MIB Index declined 0.4%, France’s CAC-40 Index dipped 0.1%, and Switzerland’s Swiss Market Index decreased 0.2%, while Spain’s IBEX 35 Index rose 0.2%.

Stocks in Asia finished mixed, with the global market rally pausing yesterday as traders assess the recent run, political uncertainty in the U.S. and Europe, and the preserved possibility of a March rate hike in the U.S. Japanese equities finished flat, with the yen holding yesterday’s gain, while stocks in China and Hong Kong slipped from a recent advance. Australian securities moved lower on the heels of a larger-than-expected drop in 4Q capital expenditures and following yesterday’s hawkish commentary from Reserve Bank of Australia Governor Lowe. Meanwhile, markets in South Korea ticked higher after the Bank of Korea kept its monetary policy unchanged, and India’s bourse extended its winning streak to six sessions.

Another light economic calendar is in store for tomorrow overseas, with reports slated for release to include consumer confidence in South Korea, PPI from Spain, and industrial orders and sales from Italy.

Market Insights 2/22/2017

Markets Mixed Following Fed Minutes

U.S. equities finished mixed, with the Dow notching another record high, while the S&P 500 and Nasdaq were near the flatline, as investors assessed political risks on both sides of the pond, as well as the minutes from the Fed’s last meeting.

Treasuries were modestly higher, even as existing home sales jumped to a 10-year high, and crude oil prices and the U.S. dollar were lower, while gold inched higher.

Meanwhile, news on the earnings front was relatively upbeat.

The Markets…

The Dow Jones Industrial Average increased 33 points (0.2%) to 20,776

The S&P 500 Index declined 3 points (0.1%) to 2,363

The Nasdaq Composite fell 5 points (0.1%) to 5,861

In moderate volume, 824 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil lost $0.74 to $53.59 per barrel and wholesale gasoline gained $0.01 to $1.73 per gallon

The Bloomberg gold spot price increased $3.04 to $1,238.78 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.2% lower at 101.22

Existing home sales rise to highest in almost a decade ahead Fed meeting details

Existing-home sales in January rose 3.3% month-over-month to a 5.69 million annual rate—the highest since February 2007—compared to the Bloomberg forecast of a 5.55 million pace. December’s figure was upwardly revised to a 5.51 million annual rate. Compared to last year, sales were 3.8% higher. The median existing-home price was up 7.1% y/y at $228,900. Housing supply came in at a 3.6-month pace at the current sales rate, and the inventory of homes for sale is down 7.1% y/y. Sales in the Northeast jumped m/m, and rose in the South and West, with all these regions higher y/y. However, sales in the Midwest were down m/m and y/y.

National Association of Realtors (NAR) Chief Economist Lawrence Yun said, “Market challenges remain, but the housing market is off to a prosperous start as homebuyers staved off inventory levels that are far from adequate and deteriorating affordability conditions.”

The MBA Mortgage Application Index declined 2.0% last week, following the previous week’s 3.7% drop. The decrease came as a 1.0% decline for the Refinance Index was met with a 2.8% fall for the Purchase Index. The average 30-year mortgage rate rose 4 basis points to 4.36%.

In afternoon action, the Federal Reserve released the minutes to the January/February Federal Open Market Committee’s monetary policy meeting where it opted to keep interest rates unchanged. The report showed that “many” Fed officials indicated support for raising rates “fairly soon” if the economy stayed the course or strengthened. However, policymakers voiced uncertainty over the fiscal policy plans of the Trump administration and Republican-controlled Congress, as well as headwinds the rising dollar may present. Following the meeting on Feb.1, the Committee’s statement appeared to foster a dovish takeaway by the markets. However, last week’s Congressional testimony by FOMC Chief Janet Yellen suggested a March rate hike was still on the table.

Treasuries finished modestly higher, as the yields on the 2-year and 10-year notes, as well as the 30-year bond, all ticked 1 bp lower to 1.21%, 2.42% and 3.03%, respectively.

Treasury yields and the U.S. dollar remained in focus, and the stock markets paused a bit from rallies to all-time highs, bolstered by continued upbeat economic data, March Fed rate hike expectations that remain intact, and lingering optimism of U.S. President Donald Trump’s reflationary policy pledges.

Tomorrow’s economic calendar will offer investors a look at some regional manufacturing activity in the form of the Kansas City Fed Manufacturing Index for February, forecasted to remain at January’s level of 9, with a reading above zero denoting expansion in activity, as well as weekly initial jobless claims, with economists expecting a slight uptick to a level of 240,000 from the prior week’s 239,000.

Europe mixed after recent run, Asia mostly higher

European equities finished mixed, with the markets assessing the recent rally and the U.S. markets pausing from all-time highs that have been driven by upbeat economic data and optimism of reflationary policies from U.S. President Donald Trump. The markets digested some mixed earnings reports in the region, along with festering European political uncertainty as a key French Presidential election looms.

The stock market sees nothing to worry about—that may be about to change. Many analysts are noting that Europe’s economy is performing the best in many years on many key measures and stock markets are currently behaving as if there is nothing to worry about, but that may be about to change now that we are within 45 trading days of the French Presidential election. History has shown that savvy investors should be prepared for a rise in volatility in global stock markets in the coming months.

The euro ticked higher and the British pound dipped versus the U.S. dollar, while bond yields in the region were mostly lower. In economic news, German business confidence unexpectedly improved for this month, and preliminary U.K. Q4 GDP growth topped expectations, while Eurozone core consumer price inflation rose in line with forecasts.

Asian markets finished mostly higher as the U.S. markets returned to action yesterday from a long holiday weekend, continuing a rally to all-time highs, despite political uncertainty in Europe and the U.S. Stocks in China and Hong Kong advanced, with financials leading the way despite a report that showed a slowdown in property price gains. Australian equities increased modestly, overcoming early losses that stemmed from hawkish commentary from Reserve Bank of Australia Governor Lowe, and showing some resiliency in the face of weakness in technology and financial issues. Markets in South Korea and India rose, with the latter extending a winning streak to five sessions. However, Japanese securities finished flat, as the yen rebounded from recent weakness.

Tomorrow’s economic calendar for overseas will be fairly light, with reports expected to include Japan’s Leading Index, GDP and the Gfk Consumer Climate Index from Germany, and CPI from Italy. Meanwhile, The Bank of Korea will meet to discuss monetary policy, with no change to its stance expected.

Market Insights 2/21/2017

Markets Begin Shortened Week in Stride

The U.S. equity markets lost no steam in their return to action following the long holiday weekend, with all the major indexes adding to record highs.

Upbeat earnings reports from Dow members Wal-Mart and Home Depot provided some sustenance, as did a much stronger-than-expected read on Eurozone business activity, despite an unexpected slowdown in growth for the U.S. manufacturing and services sectors.

Treasury yields and the U.S. dollar tacked on to their respective runs, and crude oil prices also advanced. Gold finished lower.

The Markets…

The Dow Jones Industrial Average increased 119 points (0.6%) to 20,743

The S&P 500 Index added 14 points (0.6%) to 2,365

The Nasdaq Composite gained 27 points (0.5%) to 5,866

In moderate volume, 877 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil gained $0.55 to $54.33 per barrel and wholesale gasoline was $0.02 lower at $1.50 per gallon

The Bloomberg gold spot price declined $2.49 to $1,235.98 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.4% higher at 101.38

Business activity reports show expansion surprisingly slowed

The preliminary Markit U.S. Services PMI Index for February declined to 53.9 from January’s reading of 55.6, versus the Bloomberg forecast of an improvement to 55.8. The preliminary Markit U.S. Manufacturing PMI Index for February decreased to 54.3 from January’s 55.0 level, and versus forecasts of 55.4. Markit said despite the slowdowns, the service sector is still on pace to register its fastest quarterly growth since the end of 2015, while manufacturing new order growth remained faster than at any other time since March 2015. Readings above 50 for both reports denote expansion in activity.

Treasuries were lower, as the yield on the 2-year note ticked a basis point higher to 1.20%, while the yields on the 10-year note and the 30-year bond rose 2 bps to 2.43% and 3.04%, respectively.

Treasury yields have ticked higher and the U.S. dollar continues to rally as of late, while the stock markets remain at all-time highs, bolstered by continued upbeat economic data, March Fed rate hike expectations that remain intact, and lingering optimism of U.S. President Donald Trump’s reflationary policy pledges.

Tomorrow, the U.S. economic calendar will be headlined by the release of existing home sales, the largest portion of the housing sales market, projected to rise 1.1% month-over-month to an annualized rate of 5.55 million units in January. This will be the first look at existing home sales activity in 2017, after posting the highest level of sales in a decade in 2016. The report will be followed by the afternoon release of the minutes from the Federal Open Market Committee’s (FOMC) two-day meeting that concluded on February 1st with an unchanged monetary policy decision. The statement appeared to foster a dovish takeaway by the markets but last week’s Congressional testimony by FOMC Chief Janet Yellen suggested a March rate hike was still on the table.

Europe mostly higher following upbeat business activity reports, Asia mixed

European equities finished mostly to the upside, on the heels of a much stronger-than-expected read on eurozone business activity, which helped take attention away from festering political uncertainty in the U.S. and Europe.

Markit’s Eurozone Composite PMI Index—a gauge of business activity in both the services and manufacturing sectors—improved to 56.0 in February, from 54.4 in January, and compared to the expected 54.3 reading. A level above 50 denotes expansion and this was the highest level since April 2011, with French services and German manufacturing growth highlighting the report. The euro was lower and the British pound was little changed versus the U.S. dollar, while bond yields in the region moved higher. Oil & gas issues saw some strength as crude oil prices moved higher amid optimism cooperation with OPEC production cuts will continue.

Asian stocks finished mixed as investors in the region awaited the U.S. markets to return to action following a long holiday weekend, while grappling with earnings and economic data, along with political uncertainty in the U.S. and Europe. Japanese equities gained ground, with the yen losing ground, while weakness in technology issued pressured markets in Australia.

Stocks in India and South Korea advanced, with the latter getting a boost from a report that showed the nation’s exports and imports both rose solidly in February. Chinese shares finished mixed, with stocks traded in the mainland seeing gains, while those in Hong Kong fell solidly.

Reports on tomorrow’s international economic calendar include the Leading Index and wage data from Australia, CPI from Italy and the Eurozone, Germany’s Ifo Business Climate Index, and GDP from the U.K.

60/40 Vs. Low Volatility Equities

Summary

-A 60/40 mix between stocks and bonds has historically been a rule of thumb for investors wishing to mute some of the volatility of equities.

-This article compares the 60/40 heuristic versus low volatility equities, which also offer lower equity volatility akin to a bond allocation.

-Results of the different strategies are compared over the quarter century of data available for low volatility equities.

Historically, a portfolio mix of 60% stocks and 40% bonds has been a formula for long-term investing success. This heuristic was commonly used by pension funds to capture a portion of the upside of equity markets while the bond component cushioned returns in weak market environments.

Over the last 25 years, the 60/40 rule has performed admirably. Even with stocks near all-time highs, the 60/40 portfolio (rebalanced quarterly) has trailed the S&P 500 by just 1.2% per year in a quarter-century period stretching from 1991-2016. This strong performance occurred with just 60% of the volatility of the S&P 500.

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The column on the right, though, shows that owning low volatility stocks (for example:SPLV) performed even better on a risk-adjusted basis. The S&P 500 Low Volatility Index outperformed the S&P 500 on an absolute basis with just 75% of the risk. The incremental 2.2% annualized return of low volatility stocks versus the 60/40 mix was healthy compensation for the modest uptick in risk, as reflected in the higher Sharpe Ratio. The graph below shows the cumulative returns of the 60/40 strategy, its component parts – the S&P 500 (NYSEARCA:SPY) and U.S. Aggregate Bond Index (NYSEARCA:AGG) – and the low volatility index.

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The success of the 60/40 strategy in smoothing portfolio returns is a function of the negative correlation between bonds and stocks as seen in the correlation matrix below.

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Despite the negative correlation between the S&P 500 and the Agg, the 60/40 portfolio still strongly correlates with the equity market. This is because much of the return variability is from the equity risk, a figure much higher than 60%. Even though the Low Volatility Index constituents are pulled from the S&P 500, the correlation with the broad market gauge is lower than the 60/40 portfolio. Low volatility stocks are more correlated with the 60/40 portfolio than the S&P 500.

Investors wishing to mute equity market risk in their portfolio may see WT Wealth Management utilize low volatility stocks as alternative to a healthy weight in the bond index, which has a low- to mid-2% yield. Especially in today’s environment where we feel bonds carry undue risk in light of the Federal Reserves transparent policy of wanting to raise interest rates 2-3x’s in 2017.

Low volatility strategies are now readily accessible to investors through low-cost exchange-traded funds. At WT Wealth Management we have utilized these strategies in small-cap (XSLV), mid-cap (XMLV), and large-cap stocks (SPLV, USMV) in previous highlight papers.

U.S. Market Weekly Summary – Week Ending 02/17/2017

S&P 500 Rises 1.5% on Week, Led by Financials, Health Care; Energy Slips

The Standard & Poor’s 500 index rose 1.5% this week, with financial and health-care stocks leading a climb that included all sectors except energy.

The market benchmark ended the week at 2,351.16, up from 2,316.10 a week ago. The closing level was the highest point of Friday and just shy of a new record high the index reached Thursday at 2,351.31. The financial sector logged the biggest gain of the week, up about 3%.

Among the financial sector’s gainers, Aon (AON) shares rose 1.7% this week following the risk-management and insurance provider’s report last Friday of better-than-expected adjusted earnings per share for the fourth quarter despite a revenue miss. The company also detailed an agreement for Aon to sell its benefits-administration and human-resources-business-process-outsourcing platform to Blackstone (BX) for $4.3 billion in cash at closing plus up to another $500 million based on future performance.

Health-care stocks were the next-strongest sector this week, climbing 2.5%. Laboratory Corp. of America (LH) reported fourth-quarter adjusted earnings per share and revenue above the year-earlier results as well as analysts’ estimates, prompting the clinical-laboratory operator’s stock to rise 3.4% this week.

Meanwhile, just one sector was in the red for the week: energy, which fell 2.1%. The energy sector’s price drop comes amid Wednesday data showing crude stockpiles rose by 9.5 million barrels in the week ended last Friday, reaching 518 million barrels–higher than expected and representing the highest level in data going back to 1982. Among this week’s decliners, Range Resources (RRC) lost 5.6% and Chesapeake Energy (CHK) slipped 4.4%.

Market Insights 2/17/2017

Stocks Finish Mostly Higher Ahead of Holiday Weekend

The Dow was able to turn positive in the final minutes of trading, leading to a mostly positive finish for equities ahead of the three-day holiday weekend.

Consumer staples stocks were among the top performers as the sector seemingly received a boost after Kraft Heinz submitted an unsuccessful $143 billion bid to acquire Unilever.

Treasuries and the U.S. dollar advanced, gold declined and crude oil prices were mostly flat.

The Markets…

The Dow Jones Industrial Average (DJIA) increased 4 points to 20,624

The S&P 500 Index added 4 points (0.2%) to 2,351

The Nasdaq Composite gained 24 points (0.4%) to 5,839

In moderately-heavy volume, 945 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.03 higher to $53.78 per barrel and wholesale gasoline was unchanged at $1.52 per gallon

The Bloomberg gold spot price declined $3.52 to $1,238.85 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.5% higher at 100.93

Markets were higher for the week, as the DJIA increased 1.8%, the S&P 500 Index advanced 1.5% and the Nasdaq Composite gained 1.8%

Leading Index tops forecasts

The Conference Board’s Index of Leading Economic Indicators (LEI) was up 0.6% month-over-month (m/m) in January, above the Bloomberg projection to match December’s unrevised 0.5% gain. Support came from the components pertaining to the yield curve, building permits, jobless claims, ISM new orders and consumer expectations.

Treasuries were higher, with the yield on the 2-year note dipping 1 basis point to 1.19%, the yield on the 10-year note declining 3 bps to 2.42%, and the 30-year bond rate decreasing 2 bps to 3.03%.

The stock markets paused near record high territory, Treasury yields gave back some of their recent jumps and the U.S. dollar rebounded from losses as of late. The global markets continue to grapple with resurfaced optimism regarding President Donald Trump’s reflationary policy promises, along with lingering trade and immigration concerns. Plus continued solid economic data, including signs of inflation heating up, and this week’s hawkish Congressional testimony from Federal Reserve Chairwoman Janet Yellen, are keeping the possibility of a March rate hike on the table.

Please note: All U.S. markets will be closed on Monday in observance of the President’s Day holiday.

Europe mixed to close out the week, Asia mostly lower as global market rally stalls

European equities finished mixed on the heels of yesterday’s pullback from a recent rally, and amid festering uncertainty regarding the political fronts in the U.S. and Europe. The markets appeared to assess the global rally that ushered in all-time highs in the U.S., bolstered by U.S. President Donald Trump’s reflationary policy pledges, notably tax reform. Key elections loom on the horizon for the Eurozone, which continued to hamstring sentiment. Shares of Unilever jumped on the news of Kraft Heinz’s merger proposal, which helped lift the consumer goods sector and U.K. stocks, though technology, financials and oil & gas issues led to the downside. In economic news, U.K. retail sales missed expectations for January. The euro and British pound lost ground as the U.S. dollar rebounded from a two-day pullback, while bond yields in the region finished mixed.

The U.K. FTSE 100 Index was up 0.3%, Switzerland’s Swiss Market Index rose 0.5%, and Germany’s DAX Index finished flat, while France’s CAC-40 Index fell 0.7%, Spain’s IBEX 35 Index declined 0.6%, and Italy’s FTSE MIB Index decreased 0.4%.

Stocks in Asia finished mostly lower, with the global market rally that has seen U.S. stocks hit all-time highs stalling as traders grapple with political uncertainty in the U.S. and Europe, while assessing the recent run. Japanese equities declined as the yen extended gains amid the pullback in the U.S. dollar. A retreat in banking stocks from a recent rally led Chinese stocks lower. Australian securities traded lower and South Korean equities dipped; however, Indian stocks extended a string of weekly gains after trading to the upside.

Stocks post another weekly rally to all-time highs, housing data due out next week

U.S. stocks headlined a global market rally for the week, posting more record highs as sentiment continued to shift focus to President Donald Trump’s pledged reflationary policies, highlighted by last week’s promise of a “phenomenal” tax plan in the coming weeks. This helped overshadow lingering political uneasiness toward U.S. trade and immigration and the looming key elections in Europe. The economic front continued to suggest the economy is heating up, with retail sales easily topping forecasts, regional manufacturing output surging, small business optimism remaining at the highest since December 2004, and housing construction activity besting forecasts. This appeared to help the markets absorb a sign that the possibility of a March Fed rate hike remains on the table delivered by this week’s semi-annual monetary Congressional testimony from Fed Chairwoman Janet Yellen.

Volatility in the currency and bond markets ensued, with the Dollar Index finishing little changed following a mid-week stumble, while Treasury yields nudged higher in choppy action. Stocks also showed some resiliency in the face of hotter-than-expected reads on consumer and producer price inflation. Earnings season continued to roll on but reached the home stretch as 411 companies have reported out of the S&P 500. So far, about 74% have topped earnings estimates, while 52% have exceeded sales projections, per data compiled by Bloomberg.

The holiday-shortened economic calendar next week will still bring a plethora of key reports for the markets to consider when grappling with whether a March rate-hike is in the offing. Housing will be in focus, courtesy of January existing and new home sales reports, while national business activity will be on display as Markit will release its preliminary February looks at manufacturing and services sector output. Rounding out the week, we will get the final University of Michigan Consumer Sentiment Index and the minutes from the Fed’s monetary policy meeting that concluded with an unchanged decision on February 1st.

As noted previously, investor caution is rising, which contrarily should help the bull market continue. Economic data has continued to beat expectations, but the number of upside surprises may start to level off, and investor enthusiasm toward potential new policies from Washington could wane as political realities set in. If economic data continues to surprise on the upside, a March rate hike is likely to be on the table; while there is an additional risk that the Fed may be forced to speed up the tightening process should inflation accelerate from here.

International reports to look out for include: Australia—wage inflation. China—property prices. Japan—trade balance. Eurozone—the Consumer Price Index and Markit’s business activity reports, along with German 4Q GDP and business confidence. U.K.—4Q GDP.

Market Insights 2/16/2017

Stocks Finish Mixed as Dow Ekes Out a Gain

U.S. equities managed a mixed finish with the Dow turning positive in the final hour of trading as stocks seemingly paused from their recent rally which saw major domestic indexes advancing for five-straight sessions.

Treasury yields and the U.S. dollar also pulled back despite an upbeat read on U.S. housing construction activity and a surge in regional manufacturing activity.

Gold and crude oil prices were higher, while in equity news, Dow member Cisco topped earnings expectations.

The Markets…

The Dow Jones Industrial Average increased 8 points to 20,620

The S&P 500 Index shed 2 points (0.1%) to 2,347

The Nasdaq Composite declined 5 points (0.1%) to 5,815

In moderate volume, 853 million shares were traded on the NYSE and 1.9 billion shares changed hands on the Nasdaq

WTI crude oil ticked $0.25 higher to $53.36 per barrel and wholesale gasoline decreased $0.03 to $1.52 per gallon

The Bloomberg gold spot price rose $5.15 to $1,238.85 per ounce

The Dollar Index—a comparison of the U.S. dollar to six major world currencies—was 0.7% lower at 100.48

Housing construction activity tops forecasts, regional manufacturing jumps again

Housing starts for January declined 2.6% month-over-month to an annual pace of 1,246,000 units, above the Bloomberg forecast of a 1,226,000 unit rate. December starts were upwardly revised to an annual pace of 1,279,000. Starts on single-family units grew m/m, while multi-family starts moved lower. Building permits, one of the leading indicators tracked by the Conference Board as it is a gauge of future construction, rose 4.6% m/m in January to an annual rate of 1,285,000, after December’s favorably revised 1,228,000 rate, and north of the expected annual pace of 1,230,000 units. Permits for multi-family units jumped m/m to overshadow a decline in single-family structures.

Weekly initial jobless claims increased 5,000 to 239,000 last week, below forecasts of 245,000, with the prior week’s figure unrevised at 234,000. The four-week moving average rose by 500 to 245,250, while continuing claims declined by 3,000 to 2,076,000, north of estimates of 2,050,000.

The Philly Fed Manufacturing Index in February jumped further into a level depicting expansion (a reading above zero) after surging to 43.3—the highest since early 1984—from 23.6 in January, and compared to estimates of a decline to 18.0.

Treasuries were higher, as the yields on the 2-year and 10-year notes fell 4 basis points (bps) to 1.21% and 2.45%, respectively, and the 30-year bond rate declined 2 bps to 3.06%. Treasury yields and the U.S. dollar have retreated somewhat from recent rallies, and the stock markets modestly pulled back from record high territory. These moves were bolstered by this week’s hawkish testimony from Federal Reserve Chairwoman Janet Yellen that kept the possibility of a March rate hike on the table. Moreover, economic data has remained favorable and the markets have shifted attention to President Donald Trump’s reflationary policy promises, notably tax reform, away from exacerbated concerns about global trade and immigration.

Tomorrow, the U.S. economic calendar will deliver the Leading Index, which is expected to have increased 0.5% in January, matching the increase in December.

European equities retreat on data and following recent run, Asia mixed

European equities finished lower, with the euro and British pound gaining ground on the U.S. dollar and bond yields seeing some pressure. The global markets pulled back after a recent rally, highlighted by record highs in the U.S. that has been fostered by optimism of U.S. President Trump’s reflationary policy promises and upbeat economic data. However, European political uneasiness continues to fester ahead of some key elections in the region. The earnings front weighed on stocks in the region, while the markets showed little reaction to the minutes from the European Central Bank’s January policy meeting that showed the central bank remained committed to a “very substantial degree of monetary accommodation.”

The U.K. FTSE 100 Index, Germany’s DAX Index and Spain’s IBEX 35 Index were down 0.3%, France’s CAC-40 Index decreased 0.5%, and Switzerland’s Swiss Market Index declined 0.2%, while Italy’s FTSE MIB Index rose 0.2%.

Stocks in Asia finished mixed following another day of record highs in the U.S., with the markets focusing on the recent rally in the U.S. dollar that has come courtesy of upbeat economic data, preserved March Fed rate hike expectations, and optimism regarding U.S. President Trump’s reflationary policy pledges. Japanese equities declined, as the yen regained some of a recent drop. South Korean stocks dipped, while Indian listings rose. Australian securities ticked higher, on the heels of an upbeat employment report. Stocks trading in mainland China and Hong Kong advanced.