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Weekly Vantage Point | Week of 3.14.2016

Oil and Stocks Continue to Mix Well

March 14, 2016 – Stocks surged on Friday as Wall Street embraced the European Central Bank's (ECB) stimulus package and as crude oil prices stabilized higher. Investors shrugged off initial skepticism of the stimulus plan disclosed Thursday morning after ECB President Mario Draghi signaled an end to further rate cuts. The Dow Industrials and S&P 500 both finished the week at their highest closing levels of the year; while together with the NASDAQ Composite, all three major U.S. indices posted gains for a fourth week in a row. Since its 12-year low on February 11, crude oil has rallied over 33% to recoup all its losses this year, continuing its close correlation with stocks. The S&P 500 has recouped nearly 11% over the same period, trimming its loss on the year to 1.1%.

The ECB cut its key bank lending rate by 0.5% to adopt a zero interest rate policy, raised its monthly asset purchase program by 20 billion euros to 80 billion euros (US$87 billion); and, for the first time, added corporate bonds onto its bond purchase eligibility list. It was a light economic calendar last week, with jobless claims declining to the second-lowest level this year, while the four-week average fell to the lowest since last October. Import prices fell 0.3% in February, while export prices declined 0.4%.

For the week, the S&P 500 gained 1.19%, the Dow Industrials advanced 1.21% and the NASDAQ Composite rose 0.69%. All ten major sectors posted gains on the week, led by Utilities (+2.27%), Materials (+2.19%) and Energy (+2.01%). Consumer Discretionary (+0.69%) and Industrials (+0.49%) gained the least. NYSE advancers led decliners by over 7 to 1 on Friday. WTI crude oil futures rose for a fourth week, gaining 7.18% to finish at $38.50/bbl. Oil's fourth weekly gain is its longest period of correlation with stocks since 2013. Gold futures gave back gains last week, slipping 0.67% to $1,250.70/oz. Treasuries declined a third week, pushing the yield on 10-year Treasury notes up 11 basis points to 1.985%.

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Week’s Economic Calendar

Monday, March 14: No major releases;

Tuesday, March 15: Retail Sales, Empire State Mfg Survey, Business Inventories, Housing Market Index, FOMC Meeting Begins;

Wednesday, March 16: Consumer Price Index, Housing Starts, Industrial Production, FOMC Rate & Policy Decisions;

Thursday, March 17: Jobless Claims, Philly Fed Mfg Business Outlook, Leading Indicators, JOLTS;

Friday, March 18: Consumer Sentiment, Quadruple Witching (options expirations).

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones 1.21% 4.22% -0.30% -1.22% -2.39%
S&P 500 1.19% 4.77% 1.09% -0.56% 1.30%
NASDAQ 0.69% 4.22% -3.44% -4.91% -0.92%
Russell 3000 1.09% 4.89% 0.54% -1.06% -0.67%
MSCI EAFE 1.03% 5.71% -2.19% -3.73% -6.58%
MSCI Emerging Markets 1.29% 8.24% 3.98% 1.06% -12.97%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.08% -0.43% 1.03% 1.65% 1.51%
Barclays Municipal 0.07% -0.38% 1.10% 0.97% 4.07%
Barclays US Corp High Yield 1.17% 3.76% 2.74% 2.68% -4.06%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity 2.00% 5.28% 2.02% 1.83% -19.43%
S&P GSCI Crude Oil 11.61% 18.79% 7.62% 8.23% -19.22%
S&P GSCI Gold -0.79% 2.13% 17.20% 18.91% 9.47%
Source: MorningStar
Chart of the Week: Worker Pay Trending Higher; But are Gains Tilted or Equal?
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According to data from JPMorgan (JPM) and the National Federation of Independent Business (NFIB), seasonally-adjusted survey responses indicate that tight labor markets are becoming a more difficult issue for small business. The share of firms citing either the quality of labor or the cost of labor as their most important problem (19%) is relatively high and well above the share citing poor sales. Just as striking is the recent loss of pricing power reported by small business (see Figure 3 above).

The combination of strong job growth and a seemingly disgruntled public has raised concerns that economic growth is tilted toward low-quality or low-pay jobs. The household survey in the monthly labor market report shows employment by occupational group that rank from the highest-paying category, professional and managerial jobs, to the lowest-paying category, service jobs. The latest figures show that overall household employment (measured as a 3-month average) is up 1.8% over-year-average, but professional and managerial jobs are up on average 3.4% year-over-year, rising nearly twice as fast. Meanwhile, low-paying service jobs have been growing much more slowly than overall jobs for the past several years.

Insuring Your Business Against Cyber Liability

Cyber crime can be a serious threat to businesses.

One survey found that 44% of small businesses have been a victim of a cyber-attack. And, unbeknownst to 75% of owners, business checking accounts are not protected when it comes to online hacking, unlike consumer accounts.¹

Business owners are also required to protect their customers’ personal information. In 47 states, and the District of Columbia, businesses are required to notify individuals of security breaches involving personally identifiable information.²

As evidenced by news of large-scale data breaches, online hacking has become another form of risk that businesses now face everyday. Like many risks, businesses can insure themselves against the financial damage a cyber-attack may inflict.

Cyber liability insurance may cover a range of risks, including:

  • Data Breach Management: Pays expenses related to the investigation, management and remediation of an incident, including customer notification, credit check support and associated legal costs and fines.
  • Media Liability: Covers third-party damages such as website vandalism and intellectual property rights infringement.
  • Extortion Liability: Reimburses for expenses associated with losses arising from a threat of extortion.
  • Network Security Liability: Covers costs connected with third-party damages due to a denial of access and theft of third-party information.

Cyber liability insurance is fairly new so expect a wide divergence of coverage and costs. It may be purchased separately, or as a rider to your current business insurance policy. Be prepared to comparison shop to get a better understanding of coverage and costs.

Small business owners might also keep in mind that “an ounce of prevention is worth a pound of cure.” There are steps you can take to protect your business from becoming a cyber victim.

Consider steps to protect your data.

  1. Maintain robust malware detection software and keep existing software updated.
  2. Train employees not to open links contained in emails from unknown senders.
  3. Encrypt your important data, such as bank account information, customer credit card numbers, etc.
  4. Perform a security audit.

As obvious and simple as these precautions may sound, some businesses fall victim to cyber-attacks because of their failure to take them.

  1. National Small Business Association, 2013
  2. National Conference of State Legislatures, 2015

Weekly Vantage Point | Week of 3.7.2016

Strongest Rally since 2014

March 7, 2016 – The S&P 500 rose 0.33% on Friday, capping the first four-day gain since last October, after February's non-farm payrolls exceeded forecasts and the Energy Department said domestic crude oil production is trending lower. The U.S. added 242,000 new jobs last month, topping economists' consensus projection for 191,000, while net revisions the prior two months added another 30,000. The unemployment rate held steady at 4.9%. Crude oil production fell a sixth week, as production declined from the Organization of the Petroleum Exporting Countries (OPEC) due to pipeline disruptions in Iraq. Last week's strong gains capped the S&P 500 with a third weekly gain, up 7.41% over the period, its best three-week advance since 2014. The benchmark equity index has impressively rallied 9.52% since its February 11 low and finished Friday above its 50- and 100-day moving averages for the first time in 2016. The index now remains just 2.2% below where it began the year.

Last week included a busy economic calendar. Pending home sales slowed 2.5% in January. The Institute for Supply Management's (ISM's) manufacturing PMI for February exceeded estimates (49.5 vs. 48.5), and construction spending surged 1.5% in January, up 10.4% year-over-year (YoY). In the service industries, the ISM non-manufacturing PMI Index slipped from 53.5 to 53.4 last month, reflecting a less worrisome decline than Markit Economics' alternative reading on services, sinking into contraction in February (49.7). Lastly, the U.S. trade deficit widened in January as exports and imports both declined.

For the week, the S&P 500 rallied 2.71%, the Dow Jones Industrial Average gained 367 points (+2.20%), finishing back above 17,000 for the first time this year, and the NASDAQ Composite advanced 2.78%. All ten major sectors posted gains on the week, led by Energy (+5.82%), Financials (+4.53%) and Materials (+3.31%). Consumer Staples (+1.86%) and Healthcare (+0.18%) pulled up the rear. West Texas Intermediate (WTI) crude oil futures rose for a third week, gaining 9.58% to finish at $35.92/barrel. Oil has jumped over 24% since its 12-year low on February 11. Gold futures have also resumed a bull market, rising more than 20% since its December low. Treasuries declined last week, pushing the yield on 10-year Treasury notes up just 11.2 basis points to 1.875%.

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Week’s Economic Calendar

Monday, March 7: No major releases;

Tuesday, March 8: NFIB Small Business Optimism Index;

Wednesday, March 9: MBA Mortgage Applications, Wholesale Trade;

Thursday, March 10: Weekly Jobless Claims, Treasury Budget;

Friday, March 11: Import & Export Prices.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones 2.20% 2.97% -4.71% -2.40% -6.01%
S&P 500 2.71% 3.54% -3.84% -1.73% -2.61%
NASDAQ 2.78% 3.50% -7.98% -5.57% -3.89%
Russell 3000 3.02% 3.76% -4.42% -2.12% -4.15%
MSCI EAFE 4.65% 4.63% -5.50% -4.72% -10.12%
MSCI Emerging Markets 6.92% 6.87% -2.22% -0.23% -16.98%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.22% -0.36% 1.59% 1.73% 1.62%
Barclays Municipal -0.40% -0.44% 1.55% 0.90% 3.72%
Barclays US Corp High Yield 3.14% 2.56% -0.84% 1.49% -5.72%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity 3.88% 3.21% -3.99% -0.17% -23.07%
S&P GSCI Crude Oil 9.58% 6.43% -10.13% -3.02% -30.24%
S&P GSCI Gold 4.12% 2.94% 17.21% 19.85% 5.80%
Source: MorningStar
Chart of the Week: Bull Market's Birthday Fast Approaching; Will it be Six or Seven Years?
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Data from S&P Capital IQ shows that the current bull market, born on March 9, 2009, needs to officially set a new high before recording its seventh year upward milestone. Technically, however improbable, if a 20% stumble occurs first, the birthday crown would be revoked. The record books re-written to show the bull market had instead ended on May 21, 2015. That's the date when the S&P 500 reached its most recent peak of 2,130.82. In this hypothetical scenario, it would show the bull market lasted six years. At present, using Friday's 1,999.99 closing level, the S&P 500 is down just 6.14% from its May 21 record high.

Should a new high be attained in the near future, however, investors will look back upon this seventh year as a challenging one. By size, as the above chart shows, large-caps (S&P 500) have fallen the least, down 3.8% (1-year, YoY). Small-caps (S&P 600) tumbled 5.3% and mid-caps (S&P 400) slumped 6.2%. Not surprisingly, all benchmarks and sectors are higher since the birth of this bull market, with the S&P 1500 Consumer Discretionary sector up the most at nearly 380%. Energy gained the least at 45.7%.

On a sub-industry level, only one third of the groups rose in price on the year, led by a 37% gain in Internet Retail. Surprisingly, this group's cumulative bull-market advance of about 1008% was not the top cumulative performance. That distinction goes to Catalog Retail with a surge of 1393%. The worst performance for the year went to Coal & Consumable Fuels, which was down almost 68%, and recorded a more than 83% decline during this entire bull market, the worst cumulative return of any S&P 1500 sub-industry. Assuming this twelfth bull market since WWII is still alive, it has lasted 84 months, as compared with the average age of 56 months. It rose 215% through its May 21, 2015 all-time high, versus an average price advance of 144% for all bull markets.

Serving as a Parent's Power of Attorney

If you’ve been appointed power of attorney (POA) for a parent or loved one, it’s important to understand what those powers do and do not cover since powers granted vary based on the type of POA. One thing all POAs do have in common is the fact that they expire upon the death of the grantor. At that time, the named executor in your parent’s will is the only authorized party to make legal and financial decisions, or conduct financial transactions on the decedent’s behalf.

  • General Power of Attorney - gives broad powers to a person or organization (agent or attorney-in-fact) to act on someone else’s behalf. These powers include handling financial and business transactions, buying life insurance, settling claims, operating business interests, making gifts and employing professional help. General power of attorney is an effective tool if the grantor will be out of the country and needs someone to handle certain matters, or when he or she is physically or mentally incapable of managing their own affairs. A general power of attorney is often included in an estate plan to make sure someone is appointed to handle financial matters.
  • Special Power of Attorney – specifies exactly what powers an agent may exercise by signing a special power of attorney. This is often used when the grantor cannot handle certain affairs due to other commitments or health reasons. Selling property (personal and real), managing real estate, collecting debts and handling business transactions are some of the common matters specified in a special power of attorney document.
  • Health Care Power of Attorney - grants the agent authority to make medical decisions if the grantor is unconscious, mentally incompetent, or otherwise unable to make decisions on his or her own. While different from a living will, many states allow the grantor to include preferences concerning life support. Some states will allow you to combine parts of the health care POA and living will into an advanced health care directive.
  • Durable Power of Attorney - this is simply a general, special, or health care POA that has a durability provision to keep the current power of attorney in effect. Many people execute a durable power of attorney to prepare for the possibility that they may become mentally incompetent due to illness or injury. The Durable POA may specify that it cannot go into effect until a doctor(s) certifies the grantor as mentally incompetent.

Make sure all your parent’s estate planning documents are up-to-date, you have copies and know where the original documents are kept. If you have questions, we are happy to meet with you or any friends or family members you feel would benefit from our assistance or from PlanningWorks.

Weekly Vantage Point | Week of 2.29.2016

Stocks Extend Gains into Second Week

February 29, 2016 – U.S. stocks slipped on Friday, slightly trimming a second straight weekly gain, after a pickup on the Fed's preferred measure of inflation overshadowed a surprise upward revision on fourth quarter gross domestic product (GDP) growth. The personal consumption expenditures (PCE) inflation rate, along with its core measure, both rose more than expected in January, up 1.3% and 1.7% year-over-year respectively. Commerce officials said their second (of three) fourth quarter GDP estimate grew to 1% annualized, up from an initial 0.7%. Economists' consensus forecast called for downward revision to 0.4%. The S&P 500 has advanced over 6.5% in the two weeks since reaching a 22-month low on February 11.

In other key economic data last week, Markit Economics' Manufacturing Purchasing Managers' Index (PMI) fell to 51 for February—a three-year low. However, it remains above the 50 level, which is regarded as the dividing line between growth and contraction. The S&P/Case-Shiller 20-city home price index rose 0.8% in December, capping 2015 with a 5.7% increase, matching November as the highest 12-month gain since July 2014. Lastly, a strong 4.9% increase in January durable goods orders, the largest gain since March, provided hope that the slump in manufacturing may be easing. Capital goods orders, a sub-set of overall durable goods, which had been trending lower, rebounded by 3.9% - the most since June 2014.

For the week, the S&P 500 gained 1.63%; the Dow Jones Industrial Average rose 249 points (+1.51%); while the NASDAQ Composite advanced 1.92%. Nine of the ten major sector groups posted gains last week, led by Materials (+3.16%), Consumer Discretionary (+2.90%) and Industrials (+2.26%). Trading volume slowed to an average of 7.6 billion shares per day over the past week, down 14% from the daily average this year before the advance. Despite a pullback on Friday, West Texas Intermediate (WTI) crude oil futures had the best weekly gain since last August, jumping 11% to end at $32.78/barrel. Gold futures fell a second consecutive week, falling 0.8% to end Friday at $1,222.65/oz., while copper prices rose to a three-month high. Treasuries edged lower last week, pushing the yield on 10-year Treasury notes up just 1.7 basis points to 1.763%.

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Week’s Economic Calendar

Monday, February 29: ISM Chicago-Area PMI, Pending Home Sales, Dallas Fed Mfg. Survey;

Tuesday, March 1: Markit U.S. Final PMI, ISM Mfg Index, Construction Spending;

Wednesday, March 2: ADP Private Jobs, ISM New York-Area PMI, Fed Beige Book;

Thursday, March 3: Jobless Claims, Productivity & Labor Costs, Factory Orders, ISM Non-Mfg PMI;

Friday, March 4: February Non-Farm Payrolls Report, International Trade Deficit.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones 1.51% 1.05% -6.59% -4.51% -8.65%
S&P 500 1.63% 0.67% -6.19% -4.32% -5.71%
NASDAQ 1.92% -0.33% -10.00% -8.12% -6.88%
Russell 3000 1.86% 0.69% -7.26% -4.99% -7.49%
MSCI EAFE 0.15% -1.85% -10.94% -8.95% -14.96%
MSCI Emerging Markets -0.09% -0.21% -11.35% -6.68% -23.73%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.02% 0.57% 1.71% 1.95% 1.47%
Barclays Municipal -0.28% 0.11% 2.11% 1.30% 3.91%
Barclays US Corp High Yield 1.58% 0.01% -3.91% -1.60% -8.71%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity 0.48% -2.26% -8.21% -3.90% -26.03%
S&P GSCI Crude Oil 3.24% -2.50% -23.84% -11.50% -31.97%
S&P GSCI Gold -0.84% 9.32% 14.09% 15.11% 0.85%
Source: Morningstar
Chart of the Week: Downside Tail Risk Concerns Are Shifting; From Emerging to Developing Markets
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For some time now, J.P. Morgan's (JPM's) economic forecast has incorporated elevated concerns about negative tail risks to global growth. However, the source of these concerns has shifted. Risks of a China hard landing or a disruptive emerging market (EM) credit deleveraging persist, but they have not intensified in recent months. Indeed, we have seen encouraging signs that Chinese growth is stabilizing and policies look set to stimulate credit and infrastructure spending. Instead, the focus of downside risk has intensified on developing markets (DM).

While the recent tightening in financial conditions contributes to this shift, JPM doesn't believe the overall thrust of financial conditions, netting out movements in equities, credit, oil, and interest rates, is generating a significant drag yet. However, DM GDP growth slowed sharply and broadly last quarter with Japan contracting and U.S. and Euro area growth at just 1%. Some may see this slowdown as transitory, following the pattern of choppy but above-trend DM growth over the past two years. However, signs are present that indicate a more significant behavioral shift may now be taking hold.

Economists are concerned that DM businesses may respond to the squeeze on their profits with a further slowing in capital spending and a pullback in hiring. This past week's February readings pushed business confidence down to the lowest level since late 2012, at the height of the Euro area debt crisis (see Figure 1 above). While developing and global business confidence has turned lower, we are fortunate that global consumer sentiment has most recently been on a rebound (see Figure 2). Lastly, and also favorable, the evidence on DM labor markets remains positive. Economists' consensus forecast for February payrolls, due to be released this Friday, looks for an increase to 195,000 from January's slowdown to 151,000. Let's hope they are right.

Who will be hit the hardest by recent Social Security changes?

The Bipartisan Budget Act of 2015 shut down two popular Social Security claiming tactics that may adversely impact the amount of income many pre-retirees were counting on in retirement. The restricted-application and file-and-suspend strategies enabled married and divorced couples to receive spousal benefits while delaying and continuing to grow the higher wage earner’s benefits. While the Budget Act eliminated the restricted application effective December 31, 2015, eligible married couples and divorced spouses can still take advantage of the file-and-suspend tactic if they take action prior to May 1, 2016.

The file-and-suspend strategy is particularly advantageous for married couples with a non-working or lower-earning spouse, or a divorced spouse, who want to begin receiving a portion of Social Security income prior to reaching full retirement age. To be eligible to file-and-suspend before May 1, 2016, you must have been born after May 2, 1950, but before Jan. 2, 1954, and take action to file for and suspend benefits prior to May 1, 2016. But what if you’re not eligible? If you factored one of these claiming strategies into your retirement income planning projections, you may need to reevaluate and adjust your income projections. While you can still suspend your Social Security benefits at any time, no other beneficiary, including a spouse or child, will be able to continue receiving benefits during the time your benefits are suspended.

If you need assistance in determining your eligibility for the file-and-suspend tactic before it’s phased out effective May 1, 2016, or help with projecting or reassessing your income needs in retirement contact PlanningWorks for a consultation at your earliest convenience.

Weekly Vantage Point | 2.22.16

Best Week on Wall Street This Year

February 22, 2016 – U.S. equity markets concluded the holiday-shortened week sharply higher as investors embraced signs that the market may be stabilizing. Data from Bloomberg showed that thirty-day correlations between the S&P 500 and ten other asset classes (including oil), which have held sway on investors since January, have begun to fade since February 11, when the S&P 500 closed at a 22-month low. Improved economic data also helped drive many bearish investors to buy back a sizable amount of their short positions, as companies with the highest short interest were among the best performers. At the end of January, short interest had climbed to an average of 4.3% of all shares available to be borrowed—a level reached only one other time since 2008. After the Presidents' Day holiday on Monday, follow-on gains on Tuesday and Wednesday extended the prior Friday's rebound, pushing the S&P 500 to its first three-day rally this year. It sealed the week with its strongest performance since November.

Economic updates last week showed housing starts fell 3.8% in January, while newly-issued construction permits for single-family homes rose 9.6% and increased 19.9% for multi-family homes. On Wednesday, the U.S. Federal Reserve (Fed) released the minutes from their January FOMC meeting, which showed most members were surprised by the intensity of early market turmoil this year. The minutes suggest the Fed will likely delay further rate hikes until inflation actually shows signs of heating up. Weekly jobless claims fell by 7,000 to 262,000, the fewest since November. Additionally, while the consumer price index (CPI) was unchanged in January, its core reading, excluding volatile food and energy prices, showed some healthy traction, up 0.3%, the most in over four years.

For the week, the S&P 500 gained 2.91%, the Dow Jones Industrial Average added 418 points (+2.62%), while the NASDAQ Composite surged 3.91%. All ten major sector groups rose 1% or more last week, led by Consumer Discretionary (+4.30%), Technology (+3.91%) and Industrials (+3.34%). West Texas Intermediate (WTI) crude oil futures ended Friday down 3.67% at $29.64/barrel, deeply paring a weekly gain to just 0.67% after the Energy Department said oil supplies expanded to 504.1 million barrels, the highest in 86 years. Benchmark 10-year Treasury notes were little changed with its yield ending the week at 1.746%, down less than one basis point.

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Week’s Economic Calendar

Monday, February 22: Chicago Fed National Mfg. Activity, Markit flash Mfg. PMI;

Tuesday, February 23: S&P/Case-Shiller Home Prices, Consumer Confidence, Existing Home Sales;

Wednesday, February 24: New Home Sales, Weekly MBA Mortgage Applications;

Thursday, February 25: Weekly Jobless Claims, Durable Goods Orders;

Friday, February 26: 4Q GDP Estimate (2nd of 3 estimates), Personal Incomes & Outlays, Consumer Sentiment. Baker Hughes Rig Count (1 pm ET).

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -0.21% -0.45% -7.56% -5.93% -8.87%
S&P 500 2.91% -0.94% -7.32% -5.85% -6.59%
NASDAQ 3.91% -2.21% -10.95% -9.86% -7.45%
Russell 3000 3.11% -1.15% -8.36% -6.73% -8.55%
MSCI EAFE 4.44% -2.00% -11.12% -9.08% -14.28%
MSCI Emerging Markets 4.22% -0.12% -11.15% -6.60% -22.97%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.15% 0.55% 1.71% 1.93% 1.93%
Barclays Municipal -0.28% 0.39% 2.62% 1.58% 4.34%
Barclays US Corp High Yield 1.55% -1.55% -5.77% -3.14% -9.45%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -0.44% -2.72% -8.06% -4.36% -27.19%
S&P GSCI Crude Oil -0.50% -5.56 -23.90% -14.28% -38.76%
S&P GSCI Gold -0.69% 10.25% 14.16% 16.09% 1.92%
Source: Morningstar
Chart of the Week: Annualized Margin Debt Reaches a New High; But YoY Borrowing Growth Not Worrisome
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Source: NYSE, Standard & Poor's, J.P. Morgan Asset Management.

NYSE margin debt, or credit issued by brokerages as a way for investors to purchase additional shares in the equity market, has reached an all-time high.* This development is seemingly worrisome given the events of the Financial Crisis. However, when looking at the year-over-year growth rate of margin debt relative to the growth rate of the S&P 500, which is shown above in this week's chart, a separate story emerges. From the chart, it's apparent that there was a severe dislocation between the two in both March 2000 and July 2007, with margin debt growing almost five times faster than the equity market, indicating that investor exuberance was not linked to market fundamentals.

Today's market looks much different, with margin debt only growing 1% over 2015 and the equity market, excluding dividends, falling just 0.7% in 2015 (+1.38% including dividends). Therefore, while overall margin debt levels look elevated, the growth rate in relation to equity market movements indicates that investors are being much more prudent about margin debt and that we are not witnessing a market similar to 2000 and 2007.



Weekly Vantage Point | 2.16.16

Oil Helps Stocks Halt a Five-Day Slump

February 16, 2016 – U.S. stocks finished sharply higher last Friday, snapping a five-day selloff, trimming the loss on the week for the S&P 500 to less than 1%. Crude oil rebounded on Friday, surging 12.3% for its best single-day gain in seven years, while bank shares, one of the hardest hit sectors last week, jumped the most since 2011. Oil futures rallied on news-driven speculation that OPEC and other global oil producers may collaborate to reduce production in order to raise depressed prices. Financials shares surged after the CEO of one of the largest U.S. banks personally bought nearly $27 million worth of his company's common shares.

In key U.S. economic updates, Department of Commerce officials reported Friday that retail sales rose 0.2% in January, surpassing estimates for a 0.1% gain. The increase matches a revised 0.2% December gain, which was previously reported as a 0.1% decline. Other government data showed that job openings rose to the second-highest reading on record in December, providing further evidence of improvement within the labor market. Fed Chair Janet Yellen testified before two Congressional panels last week, signaling the central bank may delay further rate increases due to global market volatility. The University of Michigan's preliminary February index for overall consumer sentiment fell to a four-month low. However, the sub-index of current situations revealed consumers remain upbeat about their personal finances.

For the week, including dividends, the S&P 500 fell 0.72%, the Dow Jones Industrial Average lost 231 points, or -1.43%, while the NASDAQ Composite edged 0.56% lower. Nine of the ten major sector groups finished negative, with Financials (-2.31%), Utilities (-2.14%) and Materials (-1.79%) falling the most. Healthcare (-0.03%) fell the least, while Consumer Staples (+0.84%) outperformed. West Texas Intermediate (WTI) crude oil futures ended Friday at $29.44/barrel, down 4.69% for the week. The U.S. dollar rose from a near three-month low last week, ending 0.5% higher on Friday to 112.96 yen and climbed 0.8% to $1.1235 per euro. Treasuries ended a six-day rally that pushed yields near record lows on Thursday. The yield on benchmark 10-year Treasury notes rose nine basis points on Friday, finishing the week down 12 basis points at 1.749%.

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Week’s Economic Calendar

Monday, February 15: Presidents' Day, All Markets Closed;

Tuesday, February 16: Empire State Mfg Survey, Housing Market Index;

Wednesday, February 17: Housing Starts, Producer Price Index, Industrial Production, FOMC Minutes;

Thursday, February 18: Weekly Jobless Claims, Philly Fed Business Outlook, EIA Oil Inventories;

Friday, February 19: Consumer Price Index, Baker Hughes Rig Count.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -1.43% -2.99% -8.45% -8.33% -11.13%
S&P 500 -0.72% -3.74% -8.34% -8.51% -8.80%
NASDAQ -0.56% -5.89% -13.08% -13.25% -9.66%
Russell 3000 -0.94% -4.14% -9.60% -9.54% -10.79%
MSCI EAFE -4.72% -6.17% -13.46% -12.95% -16.03%
MSCI Emerging Markets -3.82% -4.16% -14.39% -10.37% -25.02%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.16% 0.40% 1.98% 1.78% 1.36%
Barclays Municipal 0.28% 0.60% 3.42% 1.80% 4.44%
Barclays US Corp High Yield -1.95% -3.05% -7.78% -4.61% -10.49%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -0.20% -2.30% -8.91% -3.94% -26.72%
S&P GSCI Crude Oil 2.09% -5.09 -25.84% -3.94% -26.72%
S&P GSCI Gold 7.06% 11.02% 14.60% 16.90% 1.53%
Source: MorningStar
Chart of the Week: Oil Prices Not Likely to Set another 1-Yr Record Price Decline; Prices Could Slip Further at a Slowing Pace
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Through February 12, 2016, WTI oil prices (on a rolling 12-month percentage change basis) recently approached an extreme that had not been seen since the end of the last great recession/mega-meltdown bear market in early 2009. Oil futures had dropped nearly two standard deviations (-2SD) from the mean toward the latter part of 2015, and they are now gyrating above that level (see above chart). Since oil prices would have to drop to below $20/barrel this month or next to eclipse the -2SD level, Stewart Glickman, S&P Global Market Intelligence's (GMI) energy analyst, thinks oil price weakness will not set a new one-year decline record.

What's also of interest is the historical correlation between month-ending values for the S&P 500 and WTI oil. From 1986 to the present, there has understandably been a high correlation between the two at 0.66. As the economy grows, oil demand increases, earnings per share (EPS) estimates rise and share prices climb, and vice versa. Even when the correlation was negative, such as in 1991, it was explained by the removal of the premium placed on oil after Saddam Hussein was driven out of Kuwait. Even though S&P GMI believes the worst is likely behind us in terms of year-over-year price declines in oil prices, they are not ready to upgrade the energy sector. Prices could slip even further, but at a slowing pace.

Off-Cycle Market Commentary

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Weekly Vantage Point | 2.8.16

Stocks Retreat on Broadening Signs of Slowing

February 8, 2016 – U.S. stocks slumped last week, snapping two weeks of gains, as a mixed January jobs report and disappointing earnings sent consumer and technology shares sharply lower. The NASDAQ Composite Index finished at its lowest level since October 2014. The latest sign of weakness among a tier of momentum stocks stirred concerns that sluggishness may be broadening. At the same time, new economic data showed slowing growth in the service industries, along with manufacturing. Labor officials said employers added 151,000 new jobs last month, shy of forecasts for 190,000. And while the unemployment rate declined to 4.9%, a jump in wage growth sent the dollar higher, renewing Wall Street uncertainty about the pace of future interest rate hikes.

In key U.S. economic updates, the Institute for Supply Management said its non-manufacturing index, representing activity within the nation's service sectors, declined to the slowest level in nearly two years. A Commerce report showed factory orders fell 2.9% last month, slightly worse than projections for a 2.8% decline. The U.S. trade deficit widened to $43.4B in December, while a separate report showed worker productivity fell in the fourth quarter by the most in nearly two years.

For the week, the S&P 500 retreated 3%, the Dow Jones Industrial Average lost 261 points, or 1.6%, while the NASDAQ Composite sank 5.37%. Seven of the ten major sector groups ended negative, with Consumer Discretionary (-5.41%), Technology (-5.25%) and Financials (-3.54%) falling the most. Materials (+4.77%), Utilities (+2.57%) and Telecom (+2.06%) outperformed. Within the Russell 1000, a broad measure of large-cap performance, a group of about 100 companies having the highest price-earnings ratios fell by more than 4% on Friday, while those with the lowest price/earnings (P/E) ratios fell 2%. West Texas Intermediate (WTI) crude oil futures fell 2.6% on Friday, capping the week with an 8.1% decline. Treasuries rallied on safer-haven buying last week, pulling the yield on 10-year Treasury notes down over eight basis points to end at 1.837%.

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Week’s Economic Calendar

Monday, February 8: No major releases;

Tuesday, February 9: Job Openings and Labor Turnover Survey (JOLTS);

Wednesday, February 10: Mortgage Applications, Treasury Budget;

Thursday, February 11: Weekly Jobless Claims;

Friday, February 12: Retail Sales, Import & Export Prices, Business Inventories, Consumer Sentiment.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -1.59% -1.59% -9.28% -7.00% -9.40%
S&P 500 -3.04% -3.04% -9.98% -7.85% -6.89%
NASDAQ -5.37% -5.37% -14.64% -12.76% -7.36%
Russell 3000 -3.22% -3.22% -11.11% -8.68% -8.79%
MSCI EAFE -1.52% -1.52% -10.63% -8.64% -11.72%
MSCI Emerging Markets -0.34% -0.34% -14.10% -6.81% -22.87%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.24% 0.24% 1.41% 1.62% 0.57%
Barclays Municipal 0.32% 0.32% 2.77% 1.52% 3.43%
Barclays US Corp High Yield -1.12% -1.12% -7.32% -2.71% -8.32%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -2.10% -2.10% -11.87% -3.75% -26.19%
S&P GSCI Crude Oil -7.03% -7.03 -30.85% -15.62% -38.10%
S&P GSCI Gold 3.70% 3.70% 4.85% 9.20% -8.32%
Source: MorningStar
Chart of the Week: U.S. Corporate Profits Get Squeezed; Recession Odds Ratchet Higher
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J.P. Morgan's global Purchasing Managers Index (PMI) survey drifted just 0.2% lower last month, but at 52.5 the index remains close to its average for the current expansion. However, the squeeze on U.S. profit margins is most severe and downside risks are the greatest since the 2008-2009 financial crisis. Along with the dollar's 21% cumulative rise since mid-2014, the U.S. is a significant energy producer, under siege with collapsing world oil prices. At the same time, stagnant worker productivity has produced sufficient labor market tightening to move wage inflation modestly higher. Against this backdrop, this past week's larger-than-expected productivity drop in the fourth quarter of 2015 points to a 10% drop in corporate profits from year-ago levels. A double-digit decline in profits is a rare event outside recessions, having been recorded only twice in the last half century (see Figure 3).

In sum, global PMI activity data provides comfort that underlying global growth momentum has not meaningfully downshifted. However, with the drag on U.S. earnings intensifying and business spending softening, the risks of a broader business pullback remain elevated. J.P. Morgan's U.S. recession tracker that measures the probability of a recession within 12 months increased to just under 25% from 15% at the beginning of the year.

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