Well, summer is upon us and by the time you receive this newsletter the “Brexit Vote” will most likely, have taken place. For those of you that don’t know, “Brexit” is the vote that will take place this Thursday, June 23rd in the United Kingdom (U.K.) on whether or not to remain in the European Union (EU). Polling Data suggests that the vote will be very close and the general feeling is a vote for the UK to remain in the EU is considered a positive for financial markets while a vote to leave is considered a negative one. The EU and the UK are significant trading partners and should there be a leave vote, there would be a long drawn out process for the UK to leave the European Union and that any impact on the economy would be many months or years in the future.
So, Brexit, along with recently reported lower employment reports have our markets, worried. Is there any good news ahead? LPL Research believes there are a few positives to consider:
Strong Market Breadth – Thinking back to exactly a year ago at this time, the S&P was up 2% year to date and struggling to gain any traction. The one negative, however, was that very few stocks were leading, which is known as weak breadth. About the only stocks participating in the market’s gains were the so called “FANG” stocks (Facebook, Amazon, Netflix and Google). This weak underpinning led to volatility and an eventual big crack lower in August 2015, aided by China’s sudden decision to weaken its currency. Fast forward to today and it is once again a market that is up to close to 2% for the year and can’t seem to break out of a range. But this time, there is wide equity participation – a potentially very good sign. With new highs recently in the NYSE Advance / Decline line, LPL Research thinks this shows very little reason to believe a new bear market will start in equities anytime soon.
No One Trusts this Bull Market – There is currently an overwhelming amount of negative investor sentiment. LPL sees investor sentiment as a contrarian indicator; if everyone has sold, then only buyers are left. The flip side is if everyone is bullish, then no one is left to do the buying. The numbers are telling. In the last 13 consecutive weeks equity strategies have seen outflows while bonds have been seeing inflows. With yields at record lows, investors would still own bonds than invest in “risky” equities. All of this negative sentiment could provide future buying pressure on any good news in the 2nd half of 2016.
Stabilized Crude Oil and U.S. Dollar could act as a Tailwind – Lower oil prices have been a major hindrance to corporate earnings growth; but now with the commodity back to around $50/barrel, should it stay near current levels, it will show year over year growth by the 3rd quarter of 2016 for the first time since the oil bear market took hold in mid-2014. LPL Research thinks that with supply and demand coming more into balance, there is a good chance crude can hold these levels. Additionally, the strength in the U.S. Dollar continues to ease and could potentially provide a significant boost to earnings in the second half of the year. – Mark
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. No strategy assures success or protects against loss. Some of this research material has been prepared by LPL Financial. The Standard & Poor’s 500 Index is a capitalization weighted index of 500 stocks designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries. All indices are unmanaged and may not be invested into directly. Referenced material: LPL Research Weekly Economic Commentary & LPL Research Weekly Market Commentary, both dated June 20, 2016. Referenced Tracking No: 1-509374.