Markets, Economy

Weekly Kickstart (10/24/2016-10/28/2016)

10/24/16 8:00 AM

iStock_000000499785_Small-1Stocks edged higher last week, with the S&P 500 rising by 0.38 percent to 2,141.16. Although the benchmark index is still on track for its third monthly decline in a row, last week’s relatively small gain was enough to leave the S&P 500 just 2.24 percent below the all-time closing high hit in August. Volatility actually moderated a bit during the past five trading sessions despite there being monetary policy developments, mixed economic data, and an uptick in corporate earnings releases. Going forward, though, investors’ general level of uncertainty should remain elevated due to the various potential headwinds for the market in the near-term. In fact, a new report from Bank of America Merrill Lynch found that surveyed fund managers lifted their cash balances to an average of 5.8 percent this month, the highest level since the aftermath of the Brexit vote. The high cash allocation does not necessarily mean that fund managers expect the stock market to crash any time soon but it does imply that they are better positioned to take advantage of potential buying opportunities (selloffs)

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Some market participants even consider a high average cash balance to be a contrarian buy signal for equities because a lot of the money on the sidelines will eventually have to be put back to work (reinvested in the market) if there are not any negative developments and stocks start to rally (similar to a short squeeze). Regardless, cash allocations are likely not going to fall significantly during the next few weeks as most investors across the globe await the results of the upcoming Presidential election here in the United States. The stock market historically has underperformed during Presidential election years that did not include an incumbent seeking reelection, and the results were cited by surveyed fund managers as being among the top ten biggest “tail risks” for stocks right now. Although a major shakeup to the political landscape could have a big effect in the near-term on both equities and the whole economy, retirement investors should trust the long-term resiliency of the market and stay focused on building wealth through consistent participation in a tax-advantaged 401(k) plan and other savings vehicles. Such efforts can be enhanced with dollar-cost averaging and regularly consulting with a professional financial advisor. As always, we are here to help with any questions you may have.

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To recap a few of the things we learned about the U.S. economy last week, the positives included that mortgage applications increased, single-family housing starts lifted, building permits rose, existing home sales growth firmed, industrial production rebounded, and capacity utilization improved. As for the negatives, refinance applications slid, multi-family housing starts (rentals) collapsed, homebuilder sentiment softened, regional manufacturing activity cooled, a gauge of consumer “comfort” deteriorated, the number of Americans making first-time claims for unemployment benefits unexpectedly jumped, and household inflation pressures rose (driven by shelter and healthcare costs). This week the pace of economic data picks up with several important reports on manufacturing, housing, inflation, consumers, services sector activity, and employment scheduled to be released, along with the government’s first official estimate of U.S. gross domestic product (GDP) growth for the third quarter of 2016 due out this Friday.

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What To Watch:

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Sources: Econoday, Twitter, ThinkAdvisor, Bloomberg, BofAML, Advisor Perspectives, FRBSL

Post author: Charles Couch

Disclosures