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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

7/1/16

The stock market ended an upbeat week on a modestly higher note, extending its post-Brexit rally to a fourth straight session. Today's leg of the rebound was relatively restrained, owed partly to a 3.1% rally in the past three sessions. Other contributing factors for today's trade included softening the dollar and sector leadership from the heavily-weighted consumer discretionary (+0.8%), health care (+0.6%), and industrial (+0.4%) sectors. The Nasdaq Composite (+0.4%) finished ahead of the S&P 500 (+0.2%) and the Dow Jones Industrial Average (+0.1%).

 

Equity futures hovered near their flat lines this morning as participants examined muted trade in China against a continued rally in European bourses. China's Shanghai Composite added 0.1% as investors looked to further policy stimulus in the wake of disappointing PMI data. China's state-issued Manufacturing PMI for June (50.0; last: 50.1) showed no improvement while Caixin Manufacturing PMI signaled an accelerated contraction (48.6; last: 49.2). Investors in Europe also turned a hopeful eye to their respective central banks as they continue to digest the implications of last Thursday's Brexit vote.

 

The S&P 500 (+0.2%) extended it opening-hour rally, climbing alongside European bourses. However, the benchmark index pulled back from its high (2108.71) by mid-morning as investors weighed a similar move in European equities. The broader market slipped through the afternoon as the benchmark index failed to hold technical support near the 2105 price level. A final hour rally would push the S&P 500 back above the psychological 2100 level as seven sectors finished in the green. Consumer discretionary (+0.9%) led telecom services (+0.7%) and health care (+0.6%) while financials (-0.5%), consumer staples (-0.3%), and utilities (-0.1%) ended in the red.

 

Automakers outperformed in the consumer discretionary space (+0.9%) as investors responded to June sales data. On that note, General Motors (GM 28.89, +0.59) climbed 2.1% after reporting that year-over-year U.S. retail sales rose 1.0% in June. Elsewhere, Ford (F 12.72, +0.15) led after reporting that U.S. auto sales rose 6.0% on a year-over-year basis. Separately, travel and cruise names displayed relative strength as Royal Caribbean (RCL 69.11, +1.96) jumped 2.9%.

 

Biotechnology outperformed in the health care space (+0.6%), evidenced by the 2.1% gain in the iShares Nasdaq Biotechnology ETF (IBB 262.75, +5.41). The ETF erased Brexit-related losses, rebounding 8.8% since Monday's settlement. In the broader sector, AbbVie (ABBV 62.71, +0.80) gained 1.3% after the FDA approved its Humira medication to treat panuveitis. The broader health care sector rebounded 4.0% on a weekly basis, trailing only utilities (-0.1%; week-to-date: +4.1%) and telecom services (+0.7%; week-to-date: +4.1%) over that period.

 

The economically-sensitive financial sector (-0.5%) succumbed to profit-taking as investors looked to lock in gains following results from this week's Federal Reserve supervisory stress test. In the group, JPMorgan Chase (JPM 61.26, -0.40) and Bank of America (BAC 13.10, -0.17) lost a respective 0.7% and 1.3%.

 

The U.S. Dollar Index (95.69, -0.45) finished off its session low as the euro and the yen gained ground against the greenback. The single currency gained 0.2% against the dollar (1.1129) while the buck lost 0.6% against the safe-haven yen (102.60).

 

The Treasury complex ended on a mixed note as the yield on the 10-yr note slipped three basis points to 1.44% while the 2-yr yield ticked up one basis point to 0.59%. For the week, the yield on the 10-yr note fell five basis points despite a 3.2% gain in the S&P 500.

 

Today's participation was below the recent average as fewer than 831 million shares changed hands on the NYSE floor.

 

Today's economic data included the ISM Index for June and Construction Spending for May:

 

The ISM Index for June produced a nice headline surprise, checking in at 53.2.

That was above the Briefing.com consensus estimate of 51.4 and a step up from the 51.3 reading for May. The dividing line between expansion and contraction is 50.0.

With the June report, the manufacturing sector continued to operate in an expansion mode for the fourth straight month.

That's a welcome understanding in a market environment where growth slowdown concerns are evident.

We'd be more enthused if this was hard data as opposed to survey-based data; nonetheless, there is some value in the recognition that the ISM Index has been above 50.0 for four months running now.

The June report revealed increases in all component indexes, with the exception of the Prices Index, which fell from 63.5 to 60.5.

That's not a bad development actually. Manufacturers are still paying higher prices for raw materials, although the price escalation slowed for them in June.

Looking elsewhere, there were encouraging pickups in the New Orders Index (from 55.7 to 57.0), the Production Index (from 52.6 to 54.7), the Backlog of Orders Index (from 47.0 to 52.5), the New Export orders Index (from 52.5 to 53.5), and the Employment Index (from 49.2 to 50.4).

Total construction spending declined 0.8% in May after a downwardly revised 2.0% decline (from -1.8%) in April.

The Briefing.com consensus estimate for May called for a 0.5% month-over-month increase. The back-to-back declines in construction spending will stand as a negative input for second quarter GDP forecasts.

The estimated seasonally adjusted annual rate of $1,143.3 billion for May was up 2.8% year-over-year. It's nice to know there is some growth, yet that marks the lowest year-over-year growth rate since November 2011.

The weakness in May stemmed from declines in both private construction and public construction spending, which fell 0.3% and 2.3%, respectively, versus April.

On the private side, residential spending was flat while nonresidential spending dropped 0.7%.

The largest weights on nonresidential spending came from the manufacturing (-1.9%), commercial (-1.6%), office (-0.4%), and power (-0.2%) sectors.

On the public side, residential spending, which is de minimis, declined 0.7%.

Nonresidential spending was down 2.3% and featured a 5.4% decline in educational spending, a 4.6% decline in transportation spending, and a 5.1% drop in sewage and waste disposal spending.

On a year-over-year basis, private construction spending is up 4.7% while public construction spending is down 2.6%.

Bond and equity markets will be closed on Monday in observation of Independence Day.

 

Tuesday's economic data will be limited to Factory Orders for May (Briefing.com consensus -0.9%), which will cross the wires at 10:00 ET.

 

Dow Jones +3.0% YTD

S&P 500 +2.9% YTD

Russell 2000 +1.8% YTD

Nasdaq Composite -2.9% YTD

Week in Review: Risk-On Sentiment Limited to Stock Market

 

The stock market frolicked higher throughout the week, recovering the vast majority of a drop that resulted in the S&P 500 losing 5.3% between Friday and Monday. The S&P 500 gained 3.2% for the week, ending in-line with the Dow Jones Industrial Average (+3.2%), and just behind the Nasdaq Composite (+3.3%).

 

The rebound in equities was attributed to multiple things as the week went on. At first it was described as a function of oversold conditions on a short-term basis, then it was extended by hopes for stimulus from global monetary authorities like the Bank of England and European Central Bank. Thursday's 1.4% gain, which put the S&P 500 near its opening level from last Friday, occurred amid month-end and quarter-end flows.

 

Stocks displayed modest strength on Friday, but the bullish attitude was not shared by other markets. For instance, the dollar/yen pair retreated into Friday and remained near its low throughout the Wall Street session. The currency pair ended the week near 102.50, wiping out more than two days of slight gains. Treasuries ended the week with solid gains, pressuring the 10-yr yield to a Friday test of an all-time low near 1.381%. Gold was also a noteworthy winner, posting its fifth consecutive weekly gain and closing at a two-year high at $1338.90.

 

The rising hopes for global stimulus relegated rate hike expectations to an afterthought. The fed funds futures market is pricing in just an 18.2% chance of a rate hike in December or February.