Category Archives: Economics & Market Highlights

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A VERY DIFFERENT NASDAQ

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

Weekly Market Commentary

The Nasdaq Composite just hit 5000 today as this report was going to press and is nearing its all-time record closing high of 5048 set during the peak of the internet bubble in March 2000. The 15-year journey back to these highs after the bubble burst included two recessions along the way — one of them “Great.” This accomplishment has sparked renewed concerns that the Nasdaq’s ascent reflects a stock market bubble that may soon burst. Even with the Nasdaq at 5000, based on valuation and sentiment measures, we do not believe stocks have reached bubble territory. As we walk down memory lane to the days when we got stock picks from cab drivers and chat rooms, we see that the Nasdaq’s foundation is much stronger today.

ANOTHER BUBBLE?

To assess whether the Nasdaq reflects excessive speculation that has historically characterized bubbles, we look at several measures of valuation and sentiment. A comparison between where these measures stand today and their levels back in 2000 reveals that the environment then was very different. This comparison enhances our comfort with our positive stock market view, based on our investment process incorporating fundamentals, valuations, and technical analysis.

See our infographic, A Very Different Nasdaq,
for more comparison of 2000 and 2015.

Get the Full Market Report Here: Market Commentary 03022015

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THE MISERY INDEX

Weekly Market Commentary

By John Canally Chief Economic Strategist, LPL Financial

THE MISERY INDEX: JUNE 1980
In June 1980, the U.S. economy was just exiting the first of two back-to-back recessions. The June 2, 1980, cover of TIME magazine was “The Big Blowup,” referring not to the awful state of the U.S. economy, but to the recent eruption of Mount St. Helens in Washington state. The Business and Economy section of the magazine that month, however, was full of stories about just how bad the U.S. economy was:

  • ƒƒJune 9, 1980, “Consumers Feel the Pinch”: “With the economy in a downward spiral of still uncertain depth, many consumers have decided to cut their losses. …More Americans are unemployed, many others are doing without overtime pay, and inflation has eroded earnings.”
  • ƒƒJune 16, 1980, “The Bad News Gets Worse”: “…not only has the next recession begun, but it is already shaping up to be one of the worst slumps since the Great Depression of the 1930s.”
  • ƒƒJune 30, 1980, “Harder Times in the U.S.”: “While the Europeans generally hope to suffer only a mild slowing of economic growth, U.S. business continues to reel downward.”

The unemployment rate hit 7.6% in June 1980 and the inflation rate (as measured by the year-over-year percent change in the consumer price index [CPI]) soared to an incredible 14.4%, pushing the Misery Index (year-over-year percent change in CPI plus the unemployment rate) to 22.0% [Figure 1]. In retrospect, the 14.4% reading on the CPI in June 1980 marked the high point for inflation in the late 1970s/early 1980s. Unfortunately, for the U.S. economy, the next recession (the one that would begin in mid-1981 and last through the end of 1982) would ultimately drive the unemployment rate to 10.8%. The economy in the early 1980s was truly miserable, matching the nation’s mood.

Read Full Report Here: Economic Commentary 03022015

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GLOBAL GDP TRACKER

By John Canally Chief Economic Strategist, LPL Financial 

The top 25 global economies make up 90% of global gross domestic product (GDP). Through Friday, February 13, 2015, 13 of these economies (including countries and political unions) have already reported Q4 2014 GDP results, including the four largest economies (U.S., Eurozone, China, and India). As this commentary was being prepared for publication, Japan, the world’s fifth-largest economy, released Q4 GDP results. Between now and the end of February 2015, Thailand, Mexico, and South Africa will report Q4 2014 GDP; and in the first half of March 2015, reports are due out from Canada, Australia, Switzerland, and Sweden. In late March and early April 2015, key emerging market economies, Brazil and Russia, will report Q4 2014 GDP results.

See our infographic, “Global GDP at a Glance” for a breakdown of
developed and emerging markets’ contributions to global GDP.

Our infographic and the following table, arranged in order of Q4 2014 GDP report date, indicate:

  • Whether a country is a developed or emerging market economy
  • The size and relative size of the economy compared to global GDP
  • ƒƒThe result (if available) and consensus estimate (as compiled by Bloomberg News)

Unless otherwise indicated, the actual GDP readings and forecasts in the graphic are year-over-year readings.

In the table following the infographic, we’ve also included a comment on the economy as it relates to oil, indicating, where pertinent, whether the country is a net importer or exporter of oil, how the oil price decline is likely to impact the economy in 2015, and for the larger economies (the top 10 or so), a general comment on how the GDP outlook is shaping up for 2015. We derive these comments from the January 26, 2015, Weekly Economic Commentary, “Gauging Global Growth: An Update for 2015 and 2016.” As we noted in that commentary, the market continues to expect that global GDP growth will accelerate in both 2015 and 2016, aided by lower oil prices and stimulus from two of the three leading central banks in the world; but, in a twist on recent history, the consensus has been raising its estimate for growth in 2015 for developed economies and sharply lowering its estimate for emerging markets. We also noted that even though other factors are in play (inflation, war, sanctions, weather, fiscal and monetary policy, longer-term secular trends like demographics, etc.), the drop in oil and other commodity prices over the past year or so has played a key part in the progression of GDP forecasts across the globe… Read the Full Report here: Economic Commentary 02172015

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ENERGY SECTOR OUTLOOK: WHAT WE ARE WATCHING

Weekly Market Commentary
By Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

No sector is getting more attention right now than energy. Market participants are attracted to the potential upside after both oil and the energy sector suffered substantial declines in recent months. Many see the sector as cheap, something that is not easy to find these days in the U.S. equity market. We drive by gas stations every day where we see prices have been cut in half, serving as a constant reminder of how cheap oil is. In this commentary, we discuss what we are watching to assess the opportunity in energy.

WHAT WE ARE WATCHING

Here are some of the key factors we are watching to assess the potential upside
opportunity in the energy sector:
Supply. The massive drop in domestic oil prices (more than 50% since June 20,
2014) has been almost entirely supply driven, with modest contribution from slowing
global growth. Thanks to booming U.S. oil production [Figure 1], inventories are not
only well above the five-year range for this time of year [Figure 2, page 2], but they
are near their highest levels on record. According to the International Energy Agency

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(IEA), the global oil market is currently about 800,000 barrels per day oversupplied (for perspective, the global oil market is roughly 94 million barrels per day). We do not expect a rapid supply response from producers given low marginal costs of continuing the most cost-efficient production, which means that lower prices may be required to balance the market. We would expect the bottom in oil to be put in once the market sees actual and meaningful supply reductions, which has not happened as of yet and… Read Full Report Here: Market Commentary 02172015

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EARNINGS SEASON HIGHLIGHTS AND LOWLIGHTS

Weekly Market Commentary
By Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

Despite the massive drag from the energy sector and the negative impact of a strong U.S. dollar, fourth quarter 2014 earnings are on track to exceed the prior Thomson-tracked consensus estimate of 4.2% (as of quarter end on December 31, 2014). In fact, despite a slow start, earnings growth for the quarter (after all 500 companies have reported) should approach 7%, reaching the average historical upside surprise of 3%. As of February 6, 2015, with about two-thirds of S&P 500 companies having reported, S&P 500 earnings were on track for a 6.4% year-over-year increase for the quarter according to Thomson. In this commentary we look at some of the highlights and lowlights of this earnings season as it enters the home stretch.

HIGHLIGHTS

Industrials defying skeptics. The industrials sector had many skeptics coming into this earnings season. The sector is one of the most global and was expected to see among the biggest negative currency impacts, both in terms of translation of foreign profits and pricier U.S. exports (a strong dollar makes imports more expensive for foreign buyers). A significant portion of energy capital spending flows to the sector, so reductions in oil exploration and production investment have negatively impacted the industrials sector. Lackluster economic growth in Europe and slowing growth in China add to the challenges. But strength in North America and expanding profit margins helped offset the drags, and industrials are on pace for 12% earnings growth in the quarter, 2% above prior expectations as of quarter end. Although guidance has led to estimate reductions, as it often does for all sectors, 2015 estimates are still calling for a solid 7% earnings gain compared with 2014. Our industrials sector outlook remains positive.

Technology producing big upside surprise. The technology sector is on pace for a solid 17% year-over-year gain in fourth quarter earnings, nearly double the prior 9% expectation, representing the biggest upside surprise among all 10 equity sectors [Figure 1]. The sector has also posted the highest “beat rate” among all sectors with 88% of S&P 500 companies beating on the bottom line (tied with healthcare). This achievement is particularly impressive given the significant drag from the strong U.S. dollar (like industrials, technology is among the most global sectors). The biggest driver of the upside was Apple, which by itself generated about 2 percentage points of S&P 500 earnings growth after increasing earnings per share by 48%, well above consensus. The technology sector has benefited from revenue and earnings gains across the hardware, software, and semiconductor groups, with tailwinds from trends in mobility, cloud computing, security, and data analytics. Our technology sector view remains positive.

The biggest driver of the upside was Apple, which by itself generated about 2 percentage points of S&P 500 earnings growth.

Typical guidance reduction (ex-energy). Historically, bottom-up consensus estimates have fallen by.. Read Full Report here: Market Commentary 02092015

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EUROPE: THE ROAD TO RECOVERY?

Weekly Economic Commentary
By John Canally Chief Economic Strategist, LPL Financial

In the wake of the European Central Bank’s (ECB) decision to embark on a bond buying program (quantitative easing or QE), policymakers and investors alike are looking for signs that the program is working. Although it is still too soon to tell — QE in Europe was only just announced on January 22, 2015, and the bond purchases themselves won’t begin until next month — the economic data in Europe in recent weeks have begun to exceed lowered expectations, and market based measures of inflation expectations have moved higher. But, market participants looking for an immediate and sustained response by the Eurozone economy to QE may be disappointed. Recall that the Federal Reserve (Fed) began its first round of QE in late November 2008, and after three years (2011, 2012, and 2013) of real gross domestic product (GDP) growth near 2.0%, the economy finally found its footing in 2014, and we continue to expect that the U.S. economy may grow at 3%+ in 2015.*

Lower oil prices and a falling euro may also help to nudge Eurozone growth higher in the coming months and quarters.

As was the case in the United States in 2008 and 2009, the Eurozone economy cannot start getting better until it stops getting worse. Even before the ECB’s announcement on January 22, 2015, key readings on the economy and banking system had stabilized and had begun to turn higher, providing the Eurozone economy with a little momentum ahead of the QE. In recent weeks, several economic data reports (listed below) all suggest that the Eurozone economy had stopped getting worse in late 2014 — after another year of subpar growth. In addition, lower oil prices (Europe is a big oil importer) and a falling euro (which makes European goods and services cheaper in the global marketplace) may also help to nudge Eurozone growth higher in the coming months and quarters….Read the Full Report here: Economic Commentary 02092015

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NO DEFLATING THE U.S. DOLLAR

Weekly Market Commentary

Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial Member FINRA/SIPC

Unlike the footballs that the New England Patriots used in the AFC Championship game against the Indianapolis Colts, the U.S. dollar has remained well inflated. The dollar, which has been trending higher for nearly four years now, rose 13% in 2014 and is up another 5% so far in 2015. The latest leg up has been driven by anticipation and arrival of quantitative easing (QE) by the European Central Bank (ECB). Bold stimulus from the ECB, and other central banks around the world including the Bank of Japan, has put substantial downward pressure on the euro, the yen, and other currencies, while boosting the dollar. In general, more supply of a currency drives down its value. In this week’s commentary, we discuss some of the causes of the strong U.S. dollar and some of the most important implications for investors.

The dollar, which has been trending higher for nearly four years now,
rose 13% in 2014 and is up another 5% so far in 2015.

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WHY SO STRONG?
The U.S. dollar is strong for a number of reasons, all of them good things. Relatively strong U.S. economy. Our economy has been outperforming most international economies in recent years — especially the developed economies that are our biggest trading partners in Europe and Japan. A relatively good (even if not great) economy has helped boost U.S. financial markets and made the U.S. a more attractive destination for foreign capital. Improving trade balance. The U.S. trade balance has improved dramatically, thanks in large part to the boom in U.S. energy production and resulting drop in oil prices that has reduced U.S. imports and increased exports. By keeping more dollars here at home, a smaller trade gap is bullish for the dollar.

Improving budget deficit. The measures that the United States has taken — in some cases painfully — to reduce the deficit by cutting….

Read Full Report here: Market Commentary 01262015

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GAUGING GLOBAL GROWTH

AN UPDATE FOR 2015 & 2016

Weekly Economic Commentary

John Canally Chief Economic Strategist, LPL Financial

The outlook for global growth is important to investors, since it defines the ultimate pace of activity that creates value for countries, companies, and consumers. As investors digest the S&P 500 earnings reports for the fourth quarter of 2014, 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 in particular, since oil prices peaked in mid-2014.

The International Monetary Fund (IMF) cut its global growth forecasts for both 2015 and 2016 last week (January 19 – 23, 2015). While the IMF raised its estimate for growth in 2015 for developed economies, all of the increase to that estimate came in the United States; the IMF lowered its estimates for all other developed economies, except the United Kingdom where 2015 growth estimates were unchanged. The IMF sharply lowered its 2015 growth estimate for emerging markets (EM), with oil-producing, EM nations like Russia, Saudi Arabia, Mexico, Brazil, Venezuela, and Nigeria seeing the largest markdowns in growth.
Typically, when the IMF releases a forecast, the majority of financial market participants
take little notice of the report, and that was generally the case last week, as markets
focused more on the price of oil and the European Central Bank (ECB), than on the IMF.

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Why? Because consensus forecasts for global gross domestic product (GDP) growth are available monthly from sources like Bloomberg News, and because markets constantly react to changes in projected paths of economic growth amid the daily, weekly, and monthly drumbeat of economic data and global events.

WHY GLOBAL GDP GROWTH MATTERS
In the past, prospects for U.S. economic growth garnered the most attention from market participants, but in recent years markets have focused more on the prospects for global GDP growth. Why does global GDP growth matter? As we have noted in prior Weekly Economic Commentaries, financial markets — especially equity markets — focus intently on earnings. Broadly speaking, earnings growth is driven by “top-line” growth, or revenue growth, less the costs incurred earning that revenue, with labor accounting for….

Read the Full Report here:Economic Commentary 01262015

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DRILLING INTO THE LABOR MARKET

Weekly Economic Commentary

John Canally Chief Economic Strategist, LPL Financial

Last Friday, January 9, 2015, the United States Bureau of Labor Statistics (BLS) released its monthly Employment Situation report, providing financial markets and the public at large with the state of the labor market as 2014 ended. The U.S. economy created another 252,000 net new jobs in December 2014 and 3 million over the course of 2014. More net new jobs were added in 2014 than in any year since 1999 [Figure 1]. The unemployment rate fell to 5.6% in December 2014, the lowest reading since mid-2008.

Although the labor market has improved markedly over the past year or so, it still has a long way to go to get back to “normal,” and the Federal Reserve (Fed) is unlikely to begin raising rates until a broad range of labor market indicators are back to normal or on track to get back to normal. In our Outlook 2015: In Transit, we noted that Fed Chair Janet Yellen and the other members of the Federal Open Market Committee (FOMC) are tracking a “broad range” of labor market indicators. (See pages 10 – 11 of the Outlook for details.) Eleven of these indicators were updated with last Friday’s release, with six of them improving versus November 2014, four deteriorating, and one remaining the same.

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In an otherwise solid report, one of the big disappointments was the deceleration in wage growth as measured by the year-over-year change in average hourly earnings. Hourly earnings decelerated from 1.9% year over year in…

Read the Full Report here: Economic Commentary 01122015

Consumer discretionary (CD) Sector historically has benefited from big drops in oil.

THE BRIGHT SIDE OF CHEAP OIL

Weekly Market Commentary

Burt White Chief Investment Officer, LPL Financial
Jeff Buchbinder, CFA Market Strategist, LPL Financial

Earnings season is here and, as we wrote in our earnings preview last week (“A Tale of Two Earnings Seasons”), low oil prices and the energy sector will be the market’s main focus. Energy companies begin to report earnings this week, as energy services provider Schlumberger releases results on Thursday, January 15, 2015, although most of the sector’s results will come the last week of January and first week of February. While we try to gauge the energy sector outlook, we will also pay close attention to sectors and industries that potentially benefit the most from cheap oil, particularly in the consumer discretionary sector and the transportation industry, or the transports. (This week’s Weekly Economic Commentary, “Drilling into the Labor Market,” discusses energy’s impact on U.S. and state economies and labor markets.)

Depending on your assumptions, savings for the average American
from lower energy prices could reasonably be estimated at
over $1,000 per year.

IT STARTS WITH THE CONSUMER

The obvious place to start when analyzing beneficiaries of cheap oil is the consumer discretionary sector. The “tax cut” from lower prices at the pump is significant. U.S. consumers purchase about 140 billion gallons of gas annually, so a $1.00 drop in gasoline is a net savings of $140 billion (or about 1% of gross domestic product [GDP]). Each household that has been spending about $2,500 per year on gasoline (roughly the national average) will see a drop of perhaps $600 annually, based on U.S. Energy Information Administration (EIA) forecasts. For someone making the median income in the United States (about $52,000), that’s almost an extra week’s paycheck. And the total does not include home heating costs, where additional savings are captured, as the decline came just ahead of the coldest winter months (the sharp drop in natural gas prices is also helping). Depending on your assumptions, savings for the average American from lower energy prices could reasonably be estimated at over $1,000 per year, which for many, is like getting a raise. Keep in mind the consumer represents two-thirds of the U.S. economy.

Read Full Report here: Market Commentary 01122015

Consumer discretionary (CD) Sector historically has benefited from big drops in oil.
Consumer discretionary (CD) Sector historically has benefited from big drops in oil.