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Thursday, June 1, 2017

Monthly Market Outlook June 2017

The  Monthly Market Outlook!
Group Performance in the last...
Industry GroupMonth3 Months6 MonthsOne Year
Consumer Goods3.14.315.214.7
S&P 5001.
Industrial Goods0.51.18.519.1
Basic Materials-1.9-7.0-1.57.0

--June 2017--

May turned out to be a surprisingly bullish month for the major indices, despite the worst day for the market in 8-month and a brief surge in volatility. The one-day correction slightly changed the status quo regarding the leadership on Wall Street, as the previously stronger Nasdaq slightly underperformed the Dow and the S&P 500 in the second half of the month. The President's Russian ties were under scrutiny once again, and this recent scandal looks to be the first one that investors take seriously. The tragic attack in Manchester also caused some weakness in Europe, but the domestic benchmarks all rose to new all-time highs, despite the negative sentiment. The lackluster performance of small caps remains the only real concern for the Team, as it might signal that a deeper correction is in the works. 

Technology stocks were still among the best performers of the month, while utilities and consumer goods were also the stars of the period. While utilities are considered “defensive,” consumer goods are usually associated with a healthy economy and a risk-on environment. The laggards of the last few months, basic materials, financials, and health care issues were joined by conglomerates at the bottom of the performance list, with the latter sector losing as much as 6% in May. Comparing that to the 4% rally in utilities shows just how different the recent period has been for the various segments. The wild ride in the price of oil caused volatility in the materials segment, while the all-important financial sector is still mostly influenced by interest rate expectations. 

Digging deeper to the level of individual stocks reveals the extent of the divide, as most the market leading tech giants like Alphabet (GOOG, +7.7%), Amazon (AMZN, +7.6%), Apple (AAPL, +6.9%), and Netflix (NFLX, +7.4%) performed exceptionally, with only Facebook (FB, +1.3%) lagging its peers following a disappointing earnings report. Tobacco manufacturer Philip Morris (PM, +8.23%) also surged to new highs, just as Deere (DE, +9.35%), and WalMart (WMT, +4.07%). Pfizer (PFE, -5.8%), Amgen (AMGN, -5.80%), and Gilead (GILD, -5.92%) were the weakest majors in the healthcare segment, while Conoco-Phillips (COP, -6.51%) led the decline among the oil-related stocks. IBM (IBM, -5.34%) received a double blow, as the weak quarterly numbers were coupled with Warren Buffet's negative comments on the prospects of the company. 

Capitalization played an important role last month, as the performance gap between mega caps and small caps opened up dramatically. Small and micro caps were down by more than 3%, while the most valuable issues gained 1.7% in May. Large caps also advanced by 1.3%, while nano and mid caps drifted lower, losing around 1%. This distribution of returns is far from being a bullish sign, and the Team hopes that it won't turn out to be a bad omen for the rest of the time. The “under-the-hood” weakness is underlined by the fact that only 60% of stocks are currently trading above their 200-day moving averages. On a positive note, these divergences can vanish in a matter of days, and small caps might emerge as leaders this month, after they work their way through the correction. 

Economic numbers were less worrying in recent weeks than in April, but most of the meaningful surprises were still on the downside, putting some further pressure on Treasury yields. The prelim GDP print, nonfarm payrolls, and the ISM nonmanufacturing PMI were the bright spots of the month, and the muted number of initial jobless claims is also encouraging regarding the future of the labor market. The unemployment rate dropped to 4.4%, while wage growth also remained healthy. That said, retail sales missed expectations again, and consumer confidence also dropped unexpectedly from its recent lofty levels. The weakness in the housing market continued in earnest, with further misses across the board, as rising mortgage rates continue to hurt the segment. Industrial production beat the consensus estimate in May, but the drop in the manufacturing PMI and the weak durable orders release could hint on future problems in manufacturing. 

Following the best earnings season in 2 years, the market seems to be pretty much bulletproof against international risks, political worries, and rising interest rates. The modest economic growth combined with an ever-cautious Fed guarantees that rates won't rise too quickly, although this month's tightening move still looks likely. While we will keep an eye on the struggling small caps, the technical setup and the fundamental background are both comforting for bulls. Besides the key Fed meeting, the details regarding Trump's tax and healthcare reforms, and the movements in the price of oil could be in focus in June. The OPEC decided to extend its production cut by 9-months, but that failed to support the crucial commodity, and another drop in prices could cause further turmoil in the energy segment. That and the negative seasonality might cause some trouble in the coming weeks, but we hopes that more new highs are ahead and small caps will soon join the party Stay tuned! 

Key economic releases in June:

1st June (Thu.): ISM manufacturing PMI
2nd June (Fri.): Non-farm payrolls, Trade Balance
5th June (Mon..): ISM non-manufacturing PMI
13th June (Tue.): PPI report
14th June (Wed.): CPI report, retail sales report, FOMC statement and interest rate decision
15th June (Thu.): Philly Fed manufacturing index
16th June (Fri.): Building permits, housing starts, UOM consumer sentiment
21st June (Wed.): Existing home sales
23rd June Fri.): New home sales
26th June (Mon.): Durable goods orders
27th June (Tue.): CB Consumer Confidence
29th June (Thu.): final GDP growth

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