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Oil Hits the Skids

The S&P 500 fell 1% last week (October 13 – 17, 2014) in volatile trading, leading market participants and media pundits to speculate on how far the stock market slide—now just over 6% from the September 18, 2014, closing high — might go. In last week’s Weekly Market Commentary, “Pullback Perspective,” we cited the economic backdrop, central bank support, and valuations as reasons the pullback was unlikely to turn into a bear market (a 20% decline). This week we turn to an area that has already entered bear market territory and discuss our outlook for oil and the energy sector.

Why Does Oil Matter?

Oil has a significant impact on several key sectors of the economy….

Oil Hits the Skids

 

Current Conditions Index October 15, 2014

Over the past week, the LPL Financial Current Conditions Index (CCI) fell 13 points to 249. While the CCI has shown some downward movement since its June 2014 multiyear high, it still sits at the peak levels established

between the Great Recession and the end of 2014’s unusually cold and snowy weather. It remains consistent with the U.S. economy emerging from the modest, but steady, economic growth of recent years…

Current Conditions Index

Pullback Perspective

This latest stock market pullback has provided an unwelcome reminder that stocks do not always go up in a straight line. Even within powerful bull markets such as this one, pullbacks of 5 – 10% have been quite common anddo not mean the bull market is nearing an end. In this week’s commentary, we attempt to put the pullback into perspective. We look beyond this latest bout of volatility and share our thoughts on the current bull market, compare it with prior bull markets at this stage, and discuss why we do not think it’s coming to an end….

Pullback Perspective

 

Blasé on the Budget

The U.S. Treasury will report the federal budget figures for fiscal year (FY) 2014, which ended on September 30, 2014, as soon as this week (October 6 – 10, 2014). According to a recent report by the nonpartisan Congressional

Budget Office (CBO), the United States will likely run a $506 billion deficit in FY 2014, a $170 billion improvement from the $676 billion deficit racked up in FY 2013. As a percent of nominal gross domestic product (GDP), the

deficit in FY 2014 is expected to be 2.9%, down from 4.1% in FY 2013, leaving the public debt-to-GDP ratio — a key metric for global financial markets to assess the creditworthiness of a country — at 74%…

Blasé on the Budget

 

Housing Hiatus?

The most recent figures on gross domestic product (GDP) — the broadest measure of economic activity — revealed that residential investment (a.k.a.housing) grew at an 8.8% annualized pace between the first and secondquarters of 2014. As a result, housing contributed 0.3 percentage points to the overall 4.6% gain in GDP in Q2. It was the first time since Q3 2013 that housing added to GDP growth; but it marked the 12th quarter of the last 15, dating back to late 2010, that housing has made a positive contribution to GDP. Prior to that, between late 2005 and late 2010, housing had been a drag on the overall economy in 17 of the 20 quarters (or five years), as the economy endured the housing-induced Great Recession and its aftermath…

Housing Hiatus?

 

Mind The Gap

On September 17, 2014, the Federal Reserve’s (Fed) policymaking arm, the Federal Open Market Committee (FOMC), met for the sixth time this year. On the one hand, the FOMC surprised markets by announcing “how” it

would exit from quantitative easing (QE) and reduce the size of its balance sheet in the coming years. On the other hand, the FOMC calmed markets by not making any substantive changes to its forward guidance to the public

and financial markets on when it would begin raising rates. The statement released after the meeting once again said that the FOMC would keep rates low for a “considerable time” after QE ends. However,the new set of economic

and rate forecasts by FOMC members indicated…

Mind The Gap

 

Fall FOMC Watch

On Tuesday, September 16 and Wednesday, September 17, 2014, the Federal Reserve (Fed) will hold the sixth of its eight Federal Open Market Committee (FOMC) meetings of the year. This meeting will include a press

conference by Fed Chair Janet Yellen and FOMC members’ forecasts for the economy, the timing of the first fed funds rate hike, and the level of the fed funds rate at the end of 2014, 2015, 2016, 2017, and in the long run. In

recent years, markets have been conditioned to expect a greater possibility of policy changes at meetings accompanied by press conferences and new forecasts and, as a result, market participants have increased their odds that

the Fed will change “something” at this meeting. Although we continue to expect the Fed will again cut the pace of its bond purchase program (quantitative easing or QE) and remain on pace to exit QE by the fourth quarter of

2014, the odds have increased in recent weeks that the Fed will take some additional action. Arranged from most likely to least likely (in our view), at this week’s meeting the Fed….

Fall FOMC Watch

 

Midterms May Mean More Gains for Stocks

With the midterm elections now just two months away and campaigning starting to heat up, we thought we would share our current views on the political landscape and what it may mean for U.S equities. In our two Outlook

2014 publications for this year, we posited that the U.S. economy and corporate profits may drive the stock market higher and investors could turn their attention away from policymakers in Washington, who were such a

distraction in 2013 and earlier in the current economic expansion. We continue to see opportunities for further stock market gains over the…

Midterms May Mean More Gains for Stocks

 

Ready, Set, HIKE!

In only 10 days, the NFL regular season begins. Teams and coaches will be analyzing each other’s moves and plays, looking for any indication that can give them an edge to succeed. Some will play strong offense, others good defense from the moment of the first kickoff. Although some big plays could happen during the first kickoff or first hike, we know this is only the start of the game, and in turn only the start of the season. History suggests the same is true for the first Federal Reserve (Fed) interest rate hike as it relates to the stock market and economy. While football teams are looking for an edge against their opponents on the field, investors will be keeping a close eye on the Fed to try and gain an edge as to when it will finish winding down its bond-buying program (quantitative easing 3) and eventually begin hiking short-term interest rates. Investors appear to be comfortable with the end of quantitative easing following…

Ready, Set, HIKE!

 

Crystal Ball?

Since the dawn of financial markets, investors have been searching for signals of impending declines. Many economic indicators correlate highlywith the stock market, which means they are coincident and not leading,

and they tend to move at the same time as stocks. Some are lagging, meaning they move after stocks, which of course is not very predictive. An important goal for all investors is to find leading indicators in an attempt to

anticipate big down moves. One leading indicator that we have found with reliable predictive power is the Conference Board Index of Leading Economic Indicators (LEI). Itis always difficult to predict small stock market

pullbacks, such as the two 4 – 6% drops that the S&P 500 Index has experienced in 2014. Such pullbacks can be driven….

Crystal Ball?