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Weekly Vantage Point | Week of 5.23.2016

 
Stocks Rebound Despite Rising Rate Outlook

May 23, 2016 – The benchmark S&P 500 rose on Friday, rebounding from a seven-week low on Thursday and finished the week fractionally higher, snapping a three-week losing streak. Gains on Friday were led by strength in technology, particularly among chipmakers which, as a group, rose the most since January. The week was marked by mostly positive economic data, mixed quarterly earnings reports and the Federal Reserve's Wednesday afternoon release of their April policy meeting minutes. The minutes signaled policymakers are in favor of raising interest rates in June if the economy is strong enough by then. Pricing of Fed Funds futures now implies the odds for a June rate hike at 32%, up from 4% at the beginning of the week. The probability for 50/50 odds moved up to July from as late as February 2017.

In other key economic data last week, an index of regional manufacturing in New York fell back into contraction, housing starts grew more than forecast, and the consumer price index climbed 0.4% in April, the most since February 2013. Total industrial production rose 0.7% last month, with factory output - a subset representing 75% of overall production - increasing for the first time in three months (+0.3%). Jobless claims fell last week from a one-year high. Lastly, existing home sales advanced to a three-month high, led by a 12.1% jump in the Midwest, the strongest since December 2006.

For the week, the S&P 500 gained 0.35%, the Dow Industrials slipped 0.04%, and the NASDAQ Composite jumped 1.16%%. Five of the ten major sectors advanced, led by Energy (+1.74%), Technology (+1.51%), and Financials (+1.43%). Utilities (-2.22%) and Telecom (-2.09%) fell the most. The US dollar index gained 0.77% for a second week, ending at 95.334, while gold futures lost 1.64%. Treasuries prices fell last week, pushing the yield on 10-year Treasury notes up 13.8 basis points to end at 1.84%.

 
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Week’s Economic Calendar
 

Monday, May 23: No major economic releases;

Tuesday, May 24: Markit Flash PMI Mfg Index, New Home Sales;

Wednesday, May 25: MBA Weekly Mortgage Applications, U.S. Trade Deficit;

Thursday, May 26: Weekly Jobless Claims, Durable Goods Orders, Pending Home Sales;

Friday, May 27: 1Q GDP Revision, University of Michigan's Consumer Sentiment.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -0.20% -1.53% 6.77% 0.44% -4.28%
S&P 500 0.35% -0.42% 7.61% 1.31% -1.31%
NASDAQ 1.16% 0.04% 6.23% -4.24% -4.79%
Russell 3000 0.44% -0.58% 8.30% 1.01% -2.89%
MSCI EAFE 0.31% -3.01% 6.47% -3.20% -13.28%
MSCI Emerging Markets -1.32% -6.44% 6.47% -0.55% -22.32%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond -0.62% -0.18% 1.29% 3.24% 3.45%
Barclays Municipal -0.18% 0.37% 1.20% 2.80% 6.51%
Barclays US Corp High Yield 0.20% -0.29% 10.56% 7.09% -1.40%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity 0.48% -0.75% 13.07% 8.15% -17.40%
S&P GSCI Crude Oil 3.22% 5.42% 52.47% 30.70% -17.89%
S&P GSCI Gold -1.49% -2.67% 2.05% 18.47% 3.81%
Source: MorningStar
Chart of the Week: Deflation No Longer an Imminent Risk
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View larger image »
 

U.S. inflation has been picking up, following a prolonged period of subdued price rises. We see signs of rising inflation over the short term, with deflation no longer an imminent risk, according to BlackRock strategists. As the above purple line shows, the Consumer Price Index (CPI) rose in April, rising the most since February 2013. Seen another way, the strength in the CPI exceeds that of the forward-looking prices paid surveys, here the Institute for Supply Management's Prices Index, the green line.

Energy supply-demand fundamentals are turning from a headwind into a tailwind for inflation. Oil supply has tightened and demand is picking up, primarily out of China and India. This suggests current prices look increasingly sustainable, unless there is a significant reopening of idled shale-oil production. It points to energy's downward pressures on inflation beginning to subside, in line with the view expressed in hawkish Fed meeting minutes released last week.

BlackRock's analysis suggests rising U.S. inflation pressures will persist, as factory-gate price increases are passed on to consumers. It is not just the rebound in energy prices pushing inflation higher. An appreciating U.S. dollar is abating as a headwind. Prices of more stable service-based components of the CPI are also rising. Wages, too, are moderately increasing, as are survey-based consumer inflation expectations.

 
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The Barclays U.S. Aggregate bond Index is an unmanaged index composed of Barclays Credit government bond index, mortgage backed securities index, and asset backed securities index and is generally representative of the US Bond market.

The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.

The Barclays U.S. Municipal Bond Index is an unmanaged, market-value-weighted index of investment-grade municipal bonds with maturities of one year or more.

The Bloomberg Commodity Index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. It is composed of futures contracts on physical commodities and is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweightings of the components).

The CBOE Volatility Index (VIX) is a key measure of market expectations of near-term volatility conveyed by S&P 500 stock index option prices. Since its introduction in 1993, VIX has been considered by many to be the world's premier barometer of investor sentiment and market volatility.

CRB Index: A pricing index that measures changes in the price of 22 commodities that are believed to be among the first to react to changes in economic conditions.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

The Dow Jones Industrial Average (DJIA) is a price-weighted average of 30 significant stocks traded on the New York Stock Exchange and the Nasdaq.

The MSCI EAFE Index (Europe, Australasia, Far East) is a free float-adjusted market capitalization index that is designed to measure the equity market performance of developed markets, excluding the US & Canada.

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The NASDAQ 100 Index is a modified capitalization-weighted index of the 100 largest and most active non-financial domestic and international issues listed on the NASDAQ. No individual listing can have more than a 24% weighting. Launched on February 1, 1985, the index carried a base value of 125.

The NASDAQ Composite Index includes all domestic and international based common type stocks listed on The NASDAQ Stock Market. The NASDAQ Composite Index is a broad based index.

The Russell 1000 Index comprises the 1,000 largest companies in the U.S. equity market, and is a subset of the Russell 3000 Index. The Russell 1000 is a market capitalization-weighted index, meaning that the largest companies constitute the largest percentages in the index, affecting performance more than the smallest index members. The inception date for the Russell 1000 and 3000 indices was January 1, 1984.

The Russell 3000 Index measures the performance of the largest 3,000 U.S. companies representing approximately 98% of the investable U.S. equity market.

The S&P 500 is an index of 500 stocks chosen for market size, liquidity and industry grouping (among other factors) designed to be a leading indicator of U.S. equities and is meant to reflect the risk/return characteristics of the large cap universe.

The S&P Composite 1500® combines three leading indices, the S&P 500®, the S&P MidCap 400®, and the S&P SmallCap 600® to cover approximately 90% of the U.S. market capitalization. It is designed for investors seeking to replicate the performance of the U.S. equity market or benchmark against a representative universe of tradable stocks.

The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.

The S&P GSCI Crude Oil Index is a sub-index of the S&P GSCI and provides investors with a publicly available benchmark for investment performance in the crude oil market.

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of 400 mid-sized companies, representing more than 7% of available market cap.

The S&P SmallCap 600® measures the small-cap segment of the U.S. equity market. Introduced in 1994, the index is designed to track the performance of 600 small-size companies in the U.S, reflecting this market segment's distinctive risk and return characteristics. The index measures a segment of the market that is typically known for less liquidity and potentially less financial stability than large-caps, the index was constructed to be an efficient benchmark composed of small-cap companies that meet investability and financial viability criteria.

The U.S. Dollar Index is a weighted geometric mean that provides a value measure of the United States dollar relative to a basket of major foreign currencies. The index, often carrying a USDX or DXY moniker, started in March 1973, beginning with a value of the U.S. Dollar Index at 100.000. It has since reached a February 1985 high of 164.720, and has been as low as 70.698 in March 2008.

West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

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