Category Archives: Economics & Market Highlights

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FORECAST FOR CLEAR SKIES

LEI STILL SHOWS LOW ODDS OF RECESSION

Weekly Economic Commentary

By John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial  

Last week, global equity markets, including in the U.S., were driven lower by a variety of fears, most notably the weakness in China’s economy and financial markets, as well as the Chinese government’s response (or lack thereof). As a new trading week (August 24 – 28, 2015) begins, the S&P 500 is in the midst of its first 10% pullback since late 2011, triggering talk of recession signals. The latest reading on the Conference Board’s monthly Leading Economic Index (LEI) — released last week for July 2015 — helps to provide some timely guidance in this area.

The LEI is one of our “Five Forecasters” (see our Midyear Outlook 2015: Some Assembly Required for further discussion) and provides a valuable guidepost each month as to where we are in the economic expansion. As noted in our Outlook 2015: In Transit, when the economy has not been in recession, the S&P 500 has been positive 82% of the time and provided low double-digit returns. When the economy has been in recession, the S&P 500 has been positive just 50% of the time, with average returns in the low single digits. The latest reading on the LEI, based on data from July 2015, revealed that the LEI had climbed 4.1% since July 2014. The LEI is designed to predict the probable path of the economy 6 – 12 months in the future. Since 1960, a span of 667 months (or 55 years and 7 months), the LEI’s year-over-year increase has been at least 4.1% in 333 months. Not surprisingly, the U.S. economy was not in recession in any of those 333 months. Thus, it is highly unlikely that the economy was in recession in July 2015, despite the impact of the weakening Chinese economy, the stronger…

Read the Full Report here: WEC_082415

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GLOBAL GDP TRACKER: SUMMER 2015 EDITION

Market participants and the financial media have recently been hyper focused on the sell-off in Chinese equity prices, the sluggish pace of the Chinese economy, and the implications of both for global growth. The results thus far suggest that global growth in 2015 is indeed accelerating versus 2014. We last wrote about global growth in mid-July 2015 (“Gauging Global Growth: An Update for 2015 & 2016”), noting that the market continues to expect that global gross domestic product (GDP) growth will accelerate in 2015, 2016, and 2017, aided by lower oil prices and stimulus from two of the three leading central banks in the world. Since then, the United States (23% of global GDP), China (13%), the United Kingdom (4%), South Korea (2%), Indonesia (1%), Sweden (1%), and Singapore (less than 1%) have reported Q2 GDP. Together, those countries account for nearly 45% of global GDP. Second quarter 2015 GDP in four of the seven nations beat or matched consensus expectations (China, Indonesia, the United Kingdom, and Sweden), while five of the seven countries reported results that either were in-line with or accelerated versus the prior period (China, the United States, Indonesia, the United Kingdom, and Sweden).

This week (August 9 – 15, 2015), another six countries are scheduled to report Q2 GDP figures, including the Eurozone (24% of global GDP), Japan (6%), Russia (2%), Poland (1%), Thailand (less than 1%), and Malaysia (less than 1%). Together, these nations — a nice mix of both developed (Eurozone and Japan) and emerging market (Russia, Thailand, Poland, and Malaysia) countries — account for 35% of global GDP, which means by… Read the full Report here: Economic Commentary 08102015

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GAUGING GLOBAL GROWTH

AN UPDATE FOR 2015 & 2016

Weekly Economic Commentary

by John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial 

The market continues to expect that global gross domestic product (GDP) growth will accelerate in 2015, 2016, and 2017, aided by lower oil prices and stimulus from two of the three leading central banks in the world. The prospect for another year of decelerating growth in emerging markets remains a concern for some investors, who may still be waiting (in vain) for China to post 10–12% growth rates as it consistently did during the early to mid-2000s. The likelihood of rate hikes in the U.S. in late 2015 and the U.K. in early 2016 is also a potential growth headwind. Still, much stimulus remains in the system, and more is likely from the Bank of Japan (BOJ) and the European Central Bank (ECB), which may help bolster growth prospects in two key areas of the globe. Although China is unlikely to embark on quantitative easing (QE), Chinese authorities have recently enacted a series of targeted fiscal, monetary, and administrative actions aimed at stabilizing China’s economy in 2015 and beyond, and more such actions may follow.

The outlook for global growth matters to investors because it defines the ultimate pace of activity that creates value for countries, companies, and consumers.

1 GLOBAL GDP GROWTH HAS BEEN A GOOD PROXY FOR CORPORATE REVENUE GROWTH

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WHY GLOBAL GDP GROWTH MATTERS

The outlook for global growth matters to investors because it defines the ultimate pace of activity that creates value for countries, companies, and consumers. As investors begin to digest the S&P 500 earnings reports for the second quarter of 2015 (more than 40 S&P 500 companies will report second quarter results this week, with another 300 set to report in the final two weeks of July), we provide an update on how consensus estimates for economic growth for 2015 and 2016 — in the United States and worldwide — have evolved over the past few years, and how they have been impacted by Greece, China, oil prices, the stronger dollar, and Federal Reserve (Fed) expectations. We’ll also look at how global growth estimates are tracking for 2017.

In recent years markets have focused more on global GDP growth, whereas in the past, prospects for U.S. economic growth garnered the most attention from market participants. Why does global GDP growth matter?

Read the Full Report here: Economic Commentary 07132015

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GREECE PLAYBOOK

By Burt White Chief Investment Officer, LPL Financial
Jeffrey Buchbinder Market Strategist, LPL Financial

Weekly Market Commentary, July 10, 2015

Greece’s critical referendum took place this weekend and the Greek people resoundingly voted “no” — rejecting the latest bailout deal from creditors. The referendum result, which some interpreted as a vote to exit the Eurozone, throws Greece’s future in the currency union firmly in doubt. The unexpected result has led to a roughly 2% decline in the broad European indexes but only a modest decline in the S&P 500 (as of 3 p.m. ET today, July 6, 2015). The negative market reaction in Europe is not surprising, given polls heading into the weekend suggested a vote for the bailout was more likely. The modest decline in the U.S. may suggest markets are increasingly comfortable with the situation.

Here we try to answer the following questions:

1. Would a Greece exit (Grexit) from the Eurozone lead to contagion for
global markets?
2. Will this latest Greece crisis result in a Lehman moment?
3. Is a deal that keeps Greece in the Eurozone still even possible?
4. Does anticipated weakness in European equity markets present a
buying opportunity?

We address these questions here and provide our playbook for investing in
this environment.

ASSESSING CONTAGION RISK

We know the stock market does not like uncertainty, so the prospects of Greece’s exit, which is now potentially greater than a 50% probability, are unsettling. No country has ever left the Eurozone, and there is no blueprint for how to do so. As we list below, there are several reasons why we expect the risk of contagion to be manageable.

Little private ownership of Greek debt. More than 80% of all Greek government debt is held by government agencies and central banks. Given how little Greek debt is held by private investors, we believe the global financial system should be able to manage prospects of Greece defaulting on additional obligations (the next payment is 3.5 billion euros due to the European Central Bank [ECB] on July 20). Derivatives…

Given how little Greek debt is held by private investors, we believe the global financial system should be able to manage prospects of Greece defaulting on additional obligations.

exposure tied to Greek default cannot be precisely measured; however, we know banks are much better capitalized than they were when the Greek debt crisis bubbled over in 2012, and the data we do have for the banks suggest exposure is limited.

Bold ECB. The ECB’s willingness to “do whatever it takes” to keep the Eurozone together, and its aggressive bond buying program — which it can accelerate — suggest that it will step in to stem any signs of contagion. Should Greece’s problems remain simply Greece’s problems, the Greek crisis will be contained. Regardless of the path Greece takes, we expect the ECB could be very aggressive to ensure that markets beyond Greece continue to function as normally as possible.

Improved European economic backdrop. The European economy has been strengthening. European exporters, particularly Germany, have benefited from the..

Read the full Market Report here: Market Commentary 07062015

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THE FED AFTER THE “NO”

By John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, 7/9/2015Weekly Economic Commentary image

The “no” vote in the Greek referendum on July 5, 2015, will potentially raise the level of economic and financial market volatility in the coming weeks as global investors assess the market and economic risks associated with an increasingly likely Greek exit (Grexit) from the Eurozone and from the Eurozone’s common currency, the euro. We don’t view the potential Grexit as another “Lehman moment”; there is relatively little in the way of derivatives tied to Greek debt, and the vast majority of Greece’s debt itself is owned by supranational entities like the European Central Bank (ECB) and the International Monetary Fund (IMF), and not — as was the case with Lehman — by private investors. However, the next several weeks and months may see increased financial market and economic volatility in the Eurozone and across the globe.

From the perspective of the U.S. economy, the uncertainty surrounding the possibility of a Grexit may lead to:

  • Slower global economic growth, which, at the margin, may hurt U.S. export growth
  • ƒƒA later liftoff for the Federal Reserve (Fed); and once hikes do begin, a shallower path for rates
  • A stronger U.S. dollar for longer, as the ECB will likely speed up its quantitative easing (QE) program
  • ƒƒAn increase in economic and market uncertainty in the U.S., which could, in turn, lead to modestly slower growth

The potential for a Grexit comes at a time when the Eurozone’s once-fractured financial transmission mechanism is on the mend, and as the Eurozone economy — aided by lowered expectations and a weaker currency — is accelerating and on track to add to global growth in 2015. Now, regardless of whether Greece stays or goes, the Eurozone’s recovery is threatened by lower consumer and business confidence in the Eurozone and a disruption in, but not the end of, the improvement in the Eurozone’s financial transmission mechanism, which has been healing for more than six months now. Although the financial system disruptions of a Grexit will likely be met by strong action from the ECB, the longer the uncertainty around Greece’s fate lasts, the greater the potential impact on the European and global economies. The net result could be a lower growth path for Eurozone and the globe. The Federal Open Market Committee (FOMC) and Fed Chair Yellen — who is slated to deliver a speech on Friday, July 10, 2015 — will be watching Greece closely. For now, our view remains that the Fed is on track to hike rates for the first time in this cycle in late 2015; but the longer the uncertainty around Greece lingers, …Read the Full Report here: Economic Commentary 07062015

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ACA RULING COULD MAKE HEALTHCARE SECTOR MORE AFFORDABLE

By Burt White Chief Investment Officer, LPL Financial
Jeffrey Buchbinder Market Strategist, LPL Financial

Weekly Market Commentary, Posted June 12, 2015

The upcoming Supreme Court decision regarding premium subsidies for the Affordable Care Act (ACA, aka Obamacare) may create a buying opportunity for the healthcare sector. We believe the odds favor the status quo (all subsidies legal regardless of the state), meaning that any selling pressure related to the risk of losing insured patients may present a buying opportunity. However, a court ruling in favor of the challenger (against the administration), which would likely be met with even more selling pressure and remains a possibility, may create an even better entry point for the sector.

CONTEXT
Later this month, in the case of King v. Burwell, the Supreme Court will rule on whether ACA premium subsidies (via tax credits) are legal for individuals with Obamacare policies in states that chose to use federal health insurance exchanges rather than setting up their own state-run exchanges. When the law was written and subsequently passed in 2010, the hope in Washington was that all states would set up their own insurance exchanges for their citizens. Were this achieved, it would have eliminated the question of whether any subsidies that made insurance premiums more affordable were legal. The law is quite clear about the legality of premium subsidies in states with exchanges. However, the law is ambiguous about states that opted not to set up exchanges, which is the crux of this case.6815 market

WHICH WAY WILL IT GO
Our sources in Washington see 60% odds of the status quo (a ruling in favor of the administration), while we believe, based on the points below, that the odds may
even be a bit higher. A favorable ruling for the administration could be based on three potential arguments:

1. The court may think the intent of the law and the broad context — including consideration for the conditions under which the law could reasonably function economically — are enough to essentially prove the IRS’s intention and uphold the status quo. The section of the law that allows for the federal government to set up an exchange if a state does not, points in this direction.

Get the Full Market Report Here: Market Commentary 06082015

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BEIGE BOOK: WINDOW ON MAIN STREET

By John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, May 9, 2015

BEIGE BOOK SUGGESTS CONTINUED MODEST ECONOMIC GROWTH

The latest Beige Book suggests that the U.S. economy is still growing at a pace that is at or above its long-term trend, indicating that some of the “transitory factors” that held the U.S. economy back in the first quarter of 2015 have faded and that some upward pressure on wages is beginning to emerge. Overall, the Beige Book described the economy as expanding at a “modest or moderate” pace in most districts. In general, optimism regarding the economic outlook far outweighed pessimism throughout the Beige Book, as it has for the past two years or so.

The Beige Book is a qualitative assessment of the U.S. economy and each of the 12 Federal Reserve (Fed) districts. We believe the Beige Book is best interpreted quantitatively by measuring how the descriptors change over time. The latest edition of the Fed’s Beige Book was released Wednesday, June 3, 2015, ahead of the June 16 – 17, 2015, Federal Open Market Committee (FOMC) meeting. The qualitative inputs for the June 2015 Beige Book were collected from early April 2015 through May 22, 2015; thus, they captured a period of:

  • ƒƒIncreasing market concern around Greece
  • A disappointing bounce back in the U.S. economic data for March and April
    following the disruptions of the first quarter (port strike, bad weather, strong dollar)
  • ƒƒFalling U.S. dollar (decline began in mid-April) that remains elevated relative to
    year ago levels
  • Some stability in oil prices
  • ƒƒImproving economic activity in the Eurozone and Japan, but ongoing concern over
    weakness in China

Read the Full Report here: Economic Commentary 06082015

Job Openings and
Labor Turnover Survey (JOLTS) report for March 2015.

WATCHING WAGES

By John J. Canally, Jr., CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, May 13, 2015

The April 2015 Employment Situation report (released on Friday, May 8, 2015) indicated that the labor market bounced back in April 2015 after a difficult March, but that wages — as measured by average hourly earnings — remained tepid, up just 2.3% from a year ago, still well below the 4%+ wage gains seen just prior to the 2007 – 09 Great Recession. Despite the solid but not spectacular April employment report, wage growth — or lack thereof — likely remains a concern for Federal Reserve (Fed) policymakers as they continue to debate when they will begin raising rates in this cycle. Our view remains that the Fed may begin to hike rates in late 2015. The next Federal Open Market Committee (FOMC) meeting is June 16 – 17, 2015.

Despite the tepid wage growth economy-wide, signs that wage pressures may be building in segments of the economy have begun to appear in recent months, most recently in the latest Fed Beige Book, released in early April 2015, ahead of the April 28 – 29 FOMC meeting.

The April 2015 Beige Book noted:

Firms in many Districts, including Richmond, Atlanta, St. Louis, Kansas City, and Dallas, reported having difficulty finding skilled workers, especially in professional and business services and the IT sectors. The Richmond, Atlanta, and St. Louis Districts specifically noted an increasing incidence of voluntary turnover of employees.

This week, May 11 – 15, 2015, financial markets will digest the Job Openings and
Labor Turnover Survey (JOLTS) report for March 2015. Although often overlooked
by the financial markets, the JOLTS report contains several labor market indicators
that Fed Chair Janet Yellen says she and her colleagues on the FOMC are are watching
closely [Figure 1].

Despite the tepid wage growth economy-wide, signs that wage pressures may be building in segments of the economy have begun to appear in recent months.

WAGES IN FINANCIAL SERVICES, HEALTHCARE & MINING
LEADING THE WAY

As we wrote in our March 30, 2015, Weekly Economic Commentary, “March
Employment Report Preview,” a decisive upturn in wage inflation remains key to moving inflation and inflation expectations higher; and in the past several months…

Read the Full Report here: Economic Commentary 05112015

Job Openings and Labor Turnover Survey (JOLTS) report for March 2015.
Job Openings and
Labor Turnover Survey (JOLTS) report for March 2015.
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FORECAST FOR CLEAR SKIES: LEI SHOWS LOW ODDS OF RECESSION

By John Canally, CFA Chief Economic Strategist, LPL Financial

Weekly Economic Commentary, March 23, 2015

Without question, the key event for financial markets last week (March 16 – 20, 2015) was the Federal Reserve’s (Fed) decision to remove the word “patient” from its policy statement, putting market participants on watch for a rate hike later this year. But, as always, the devil is in the details. While the Fed’s policymaking arm, the Federal Open Market Committee (FOMC), signaled last week that it is ready to raise rates when members are “reasonably confident” that inflation will move back toward its 2.0% target, FOMC members substantially lowered their forecast for the level of the fed funds rate over the next several years. In addition, the FOMC lowered its forecast for gross domestic product (GDP) growth and inflation over the next few years. On balance, the outcome of the meeting confirmed our long-held view that the Fed would keep rates “lower for longer.” Fed Chair Janet Yellen’s post-FOMC meeting press conference confirmed the “lower for longer” theme, reminding viewers around the world that although the FOMC removed “patient,” it did not mean that the FOMC was going to raise rates at the next FOMC meeting in April. Yellen also stressed that a rate hike was not a sure thing and remained “data dependent,” i.e., they would need to see the labor market continuing to improve, inflation stabilizing, and inflation expectations moving higher for the period ahead.

We will continue to watch what the Fed is monitoring (the labor market, inflation, and inflation expectations) and will provide updates on the progress of these key metrics as needed. We provided an in-depth look at what the Fed is watching on the inflation side in last week’s (March 16, 2015) Weekly Economic Commentary, “FOMC Preview: When, How Often, and How Much.” The minutes of last week’s FOMC meeting will be released in mid-April and the next FOMC meeting is April 28 – 29, 2015.

LOOKING AHEAD WITH THE LEI

A report that may have been overlooked by financial market participants last week was the Conference Board’s monthly Leading Economic… Read the Full Report here: Economic Commentary 03232015

U.S. Dollar index and EUR-USD currency spot exchange rate trends moving in opposite directions

THE DOLLAR’S RIPPLE EFFECT

By Burt White Chief Investment Officer, LPL Financial
David Tonaszuck, CMT Technical Strategist, LPL Financial

Weekly Market Commentary

In technical analysis, “intermarket analysis” looks at the way in which various markets interact. Intermarket analysis primarily looks at four market sectors: currencies, commodities, bonds, and stocks. From a technical analyst’s perspective, focusing our attention on only one market without considering what’s happening in the others leaves us in danger of missing vital directional clues and potential profits.
The dollar, which has appreciated 24.4% since June 30, 2014 (as of March 19, 2015), has had an unusually strong intermarket effect of late. Today, we look at the dollar’s recent impact on other major markets and what it means for investors from a technical perspective. Since June 2014, a strong U.S. dollar has created a tailwind for European equities, while creating headwinds for the euro and commodities, especially crude oil, as well as equity markets for commodity-exporting emerging market countries such as Brazil. (To read about the dollar’s impact on domestic equity markets, see the March 16, 2015, Weekly Market Commentary, “Dollar Strength Is a Symptom Not a Cause.”)

CURRENCY RIPPLE EFFECTS

The strength or weakness of the U.S. dollar, as measured by the U.S. Dollar Index, is determined by the dollar’s value against a basket of major world currencies. As of March 19, 2015, the euro made up 57.6% of the U.S. Dollar Index. A strong dollar, therefore, generally corresponds to a weak euro. Technically, the U.S. Dollar Index has been operating in a bullish price trend, as represented by a positively sloping 40-week simple moving average [Figure 1, page 2]. The magnitude of its price move higher since July 2014 may be considered substantial, reflected by a weekly 14-period relative strength index (RSI [14]) value of 74 [Figure 2, page 2]. The RSI (14) is a technical momentum indicator that compares the magnitude of gains to losses over the last 14 trading periods. For the RSI (14), any reading above 70 is considered a strong, possibly overbought, uptrend; any reading below 30 is considered a strong, possibly oversold, downtrend. Conversely, related weakness in the price of a euro in dollars (EUR-USD) has….Get the Full Market Report Here: Market Commentary 03232015

U.S. Dollar index and EUR-USD currency spot exchange rate trends moving in opposite directions
U.S. Dollar index and EUR-USD currency spot exchange rate trends moving in opposite directions