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Market Intelligence Desk: June Review & Look Ahead .

The Q2 2017 Review and Look Ahead from Nasdaq’s Market Intelligence Desk (MID).

Market Intelligence Desk: June Review & Look Ahead

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Summary:

  • Financials and healthcare outperformed in June and were among the leaders in the second quarter
  • Telecom, consumer and energy shares lagged
  • The market leading tech sector fell 2.75% in June but remains the YTD performance leader
  • Crude Oil prices fell to $42 in June before rebounding; closed down almost 5% as U.S. supplies continued to flow
  • Dollar weakness continued and marked the reversal of the “Trump Trade”
  • Eurozone economies and stocks performed well; U.S. no longer seen as the only growing economy

Global stocks had their best first half since 2009 with all but four of 30 major indices moving higher. According to the Wall Street Journal, only four first half rallies in the past 20 years have been as widespread as the current one.

The quarter ended with the S&P 500 and Dow Industrials posting their seventh consecutive quarterly advance, the longest streak for the S&P since 2014 and Dow going back to the mid-1990s. The Nasdaq Composite and Russell 2000 posted their fourth and fifth consecutive quarterly gains respectively, helped in late 2016/early 2017 by expectations of post-election fiscal stimulus. Lately hopes for swift action out of Congress have greatly diminished. The focus in the U.S. has turned to whether falling growth and inflation readings are temporary amid Fed tightening, while signs of growth outside of the U.S. have international markets rallying. Central banker commentary has been interpreted by some as somewhat more hawkish.

Sector performance saw continued disappointment from energy throughout the entire quarter. However, in June, a rotation clearly developed to the benefit of financials and healthcare.

Financials gained 3.8% in Q2 for its fifth quarterly advance. Virtually all of those gains occurred in June when the sector gained 6.3% after three straight months in the red. Central bank meetings appeared to be the positive catalyst as financials rose sharply in the week leading into the Fed’s June rate hike, and then rose sharply again later in the month following the ECB’s meeting and hawkish commentary from Draghi. In the last week of June alone, the long 10-year treasury yield rallied nearly 20bps from 2.12% to 2.31%.

Healthcare gained 6.7% in Q2 after Q1’s strong 7.9% gain. Through 1H’17, the healthcare sector gained 15.1%--second only to technology’s 16.4% gain. While technology remains 2017’s top performer, in June the group experienced its biggest drawdown since the November election (-2.8%), and could be entering a period of consolidation over the coming months. In particular, the Philadelphia Semiconductor Index (SOX) gained 14.2% in 1H’17, however, that is down from the 26.9% gains it achieved at its June high.

The energy space declined 7.0% in the second quarter and has been in the red every month this year, making thisthe longest stretch of monthly losses for the sector in nearly 30 years. The declines are driven by continued weakness in crude with WTI down 8.5% for the quarter and 4.2% in June—the worst June showing since 2011. In a reflection of the continuing weakness, companies in the S&P-500 energy lost $220B in market value thus far this year and $660B since the 2Q14 peak. The Wall Street Journal reported on June 21 that energy now represents 6% of SPX versus 7.6% at the end of last year and 13% at the end of 2008. Given the bearish sentiment, a sharp short-covering rally is always a possibility in the near term, but the outlook remains pessimistic going further out. Devon Energy recently warned that crude could go to $30 next year; BP is saying “further, painful cost reductions" if prices keep slipping; and an analyst at Seaport Global said crude prices need to fall to $40 a barrel to force production cuts that would stabilize supply and demand. Against that bearish outlook, there are signs that U.S. production may begin to wane, which might bolster prices.

Consumer stocks have underperformed the broader market YTD, in the second quarter and in June. Much of the focus has been in retail sales moving online, hurting some traditional names. The S&P 1500 Consumer Staples Index posted nearly a 1% loss for the month of June compared to the S&P 500 Index gain of 0.5% in June. News in the space included the surprise Amazon bid for Whole Foods and Walgreens Boots Alliance terminating its bid for Rite Aid. Amazon made a new all-time high briefly crossing over $1000 to trade as high as $1017.00 following the announcement.

Sector Performance:

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Dollar: 

The U.S. Dollar surged in the weeks after the election, driven by expectations for reflation. As prospects for tax reform and major infrastructure spending get pushed farther out, and with economic data cooling, the dollar has been in a slow decline from its December 28th peak, ending the quarter at September 2016 levels. In fact, the dollar has its worst first half in 6 years as investors have become more confident about Europe and other economies, while the excitement of post-election fiscal stimulus has waned. The Euro rallied sharply from December lows near $1.04 to end June at 52-week highs at $1.145. This level has been a key resistance level going back two years, which combined with extended momentum readings suggest the pair may need to consolidate in the near term. However given the prior steep decline over 2014 and 2015, there is risk for a sharp move higher once the EURUSD clears the 1.145-1.15 resistance. The U.S. is no longer seen as the main driver of global growth.

Volatility: 

Low volatility remains a theme in the current market. The S&P-500 Index has experienced just one session with a 1% or more decline this quarter in May; the last time that occurred was 1985. The Nasdaq Composite ended the quarter at 163 days without experiencing so much as a 5% decline, the longest stretch since 1989. Bloomberg reported that the VIX hit its lowest quarterly average since 2006, with the short volatility trade paying off in the first half of 2017. However, investors are seen as preparing for more volatility in the months to come. According to StreetAccount, the iPath S&P 500 VIX Short-Term Futures ETN, which gains when volatility rises, had inflows in June for a fifth month out of six this year. Goldman weighed in on the low volatility stating that we’ve been experiencing, stating that typically a large stock such as war or recession has been required to snap low market volatility.

Looking Ahead:

Geopolitical and political uncertainties also continue to lurk.

  • The quarter began with Trump saying the U.S. will act alone on North Korea if China doesn’t assist. The U.S. now seems to be on a path toward acting unilaterally.
  • The U.S. Navy conducted air strikes in Syria at the beginning of the quarter and Trump threatens more of the same should Asad forces use chemical weapons.
  • Elections in France were viewed with a sigh of relief for the status of the EU and have helped European shares. But in the U.K., Prime Minister May’s party failed to win a majority in the Snap election.
  • In the U.S., Trump fired FBI Director back in May and that set off a firestorm culminating with the appointment of a Special Counsel, with an investigation ongoing. Further delays to a tax cut or fiscal stimulus agenda could hurt stocks.

Earnings:

Earnings have been generally good except for retailers. June was a light month for releases, but July will kick off the Q2 earnings season. According to FactSet, the estimated earnings growth rate for the S&P 500 is 6.6% in Q2. Nine sectors are expected to report earnings growth for the quarter, led by the Energy sector though recent oil prices might put a dent in results. For Q2, 76 S&P 500 companies have issued negative EPS guidance and 38 S&P 500 companies have issued positive EPS guidance.

What to watch for:

As the Fed continues to tighten and the ECB makes initial hawkish commentary, investors will be watching closely to see if the current low inflation and growth readings are transitory. If growth stalls, bonds should rally and tightening efforts could be delayed. The FOMC increased rates in June as expected and with it delivered a hawkish forecast of another rate hike and balance sheet taper in 2H’17, but given the stalled ‘reflation trade’ the market only assigns a 47% chance of another hike late this year.

Stocks have had a great run year-to-date. The very end of the first half saw a tech selloff and sharp spikes in bond yields and currencies even as volatility remained low by historical standards. At the same time, low unemployment and improving economic data have paved the way for monetary policy normalization amid softer growth and inflation readings. A more normal monetary policy stance would mean the economy and stocks will have to stand on their own merits and that stock and sector selection will take on greater significance. However, if inflation data is weak then bonds may rally, the Fed may delay tightening, and stocks may be forced to continue to rely on fiscal stimulus instead of hoped-for economic growth.


The information contained herein is provided for informational and educational purposes only, and nothing contained herein should be construed as investment advice, either on behalf of a particular security or an overall investment strategy. All information contained herein is obtained by Nasdaq from sources believed by Nasdaq to be accurate and reliable. However, all information is provided “as is” without warranty of any kind. ADVICE FROM A SECURITIES PROFESSIONAL IS STRONGLY ADVISED.

Nasdaq's Market Intelligence Desk (MID) Team includes:

Michael Sokoll, CFA is a Senior Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over 25 years of equity market experience. In this role, he manages a team of professionals responsible for providing NASDAQ-listed companies with real-time trading analysis and objective market information. 

Jeffrey LaRocque is a Director on the Market Intelligence Desk (MID) at Nasdaq, covering U.S. equities with over 10 years of experience having learned market structure while working on institutional trading desks and as a stock surveillance analyst. Jeff's diverse professional knowledge includes IPOs, Technical Analysis and Options Trading. 

Steven Brown is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq with over twenty years of experience in equities. With a focus on client retention he currently covers the Financial, Energy and Media sectors. 

Christopher Dearborn is a Managing Director on the Market Intelligence Desk (MID) at Nasdaq. Chris has over two decades of equity market experience including floor and screen based trading, corporate access, IPOs and asset allocation. Chris is responsible for providing timely, accurate and objective market and trading-related information to Nasdaq-listed companies.

Annie O'Callaghan is Director on the Market Intelligence Desk (MID) at Nasdaq. Annie has worked for NASDAQ in a variety of roles including support of Nasdaq C-level management in client retention and customer service. Annie also served as a Sales Director in Nasdaq’s Transactions Services business. Prior to joining Nasdaq, Annie worked at AX Trading, managing accounts for its Alternative Trading System and served on Credit Suisse's trading desk as an Electronic & Algorithmic Sales Trading Analyst.

Brian Joyce, CMT has 16 years of trading desk experience. Prior to joining Nasdaq Brian executed equity orders and provided trading ideas to institutional clients. He also contributed technical analysis to a fundamental research offering. Brian focuses on helping Nasdaq’s Financial, Healthcare and Airline companies among others understand the trading in their stock. Brian is a Chartered Market Technician.

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