U.S. equities rallied Friday, closing narrowly higher, in a partial reversal of yesterday’s sharp declines. At the sector level, bond proxies lagged while Technology and Consumer Discretionary were standouts to the upside. Tensions between the U.S. and North Korea continued to dominate headlines as rhetoric further escalated, but markets seemed to discount the likelihood of the situation getting out of control. Volatility was also in focus, with the unchanged fundamental narrative of dip buying tempered by concerns about coming debt ceiling and budget deadlines.

 

On the U.S. economic front, Headline and Core CPI M/M (Jul) was slightly softer than expected. On a Y/Y basis, Headline CPI (Jul) was also slightly below forecasts while Core CPI (Jul) was in line. This was the fifth straight month that Core CPI M/M was softer than anticipated. Specifically, lodging, which posted a record decline, and new vehicle prices, which were down the most since 2009, were among the main drivers of weakness.

Globally, the sole economic release of note came from Germany, where CPI Y/Y (Jul F) was unrevised at 1.7%. The IEA Monthly Oil Market Report, however, was also in focus after it forecasted higher than anticipated production from OPEC due to a weakening of resolve toward production cuts. Markets in the Asia/Pacific region were lower across the board, with the Nikkei 225 closed for holiday, the Hang Seng -2.04%, the Shanghai Composite -1.63%, and Australia -1.18%

Market Outlook

The call for this week: Remember, immediately prior to late last week’s weakness, the Dow Jones Industrial Average had closed up 10 straight sessions, and nine of those were at all-time highs. The stock market just does not typically collapse from a period of strength like that. Bespoke Investment Group looked at all previous eight-session or longer streaks of consecutive record closes going back to 1928, and the one, three, and six-month returns going forward were all comfortably better than average . We still advise some near-term caution as we wait for more definitive signs of a bottom to be reached, but, as illustrated recently, there remains quite a bit of support underneath the S&P 500 to hopefully prevent a major decline. The saber rattling may continue into this week, but we will also get a busier economic calendar to possibly provide alternative talking points. Obviously, the situation could devolve very quickly should tensions escalate further, so, to repeat, there’s nothing wrong with managing risk and protecting the downside. Yet, for most long-term investors, we continue to believe the secular bull market will reward those who remain invested and don’t think getting too defensive is warranted at this time. The U.S. futures seem to agree this morning, with the major average bouncing a bit, but it will take a daily close above 2460 in the S&P 500 to help convince us the market has moved on from North Korea for now.

 

There are no U.S. macro-economic releases anticipated on Monday.

Disclaimers and Disclosures

Investing Risks:  The risk of loss from investing in securities (stocks, ETFs, mutual funds, etc.), bonds, options, futures, and forex or related products, can be substantial.  Investors must consider all relevant risk factors, including their own personal financial situation, before investing.

Investments in bonds and fixed income products are subject to various risks (including liquidity, interest rate, financial, and inflation risks) and special tax liabilities.  

Options Risks:  Options involve risk and are not suitable for everyone.  Options trading privileges are granted at the account level by your custodial broker and are subject to review and approval.  Not all account holders will qualify.  Before trading options, a person must receive a copy of Characteristics and Risks of Standardized Options. Individuals should not enter into options transactions until they have read and understood the risk disclosure document, Characteristics and Risks of Standardized Options, which can be found on our website www.mscm.net.  Copies may be obtained by contacting your broker or the Options Clearing Corporation.

Spreads, Straddles, Strangles, and other multi-leg option strategies can entail substantial transaction costs, including multiple commissions, which may impact any potential return.  These are advance option strategies and often involve greater risk, and more complex risk than basic options trades.  

Portfolio Margin:  A portfolio margin account generally permits greater leverage in an account, and greater leverage has the potential to create greater losses in the event of adverse market movements.  Portfolio Margin, or Risk-Based Margin, is a margin methodology that sets margin requirements for an account based on the greatest projected net loss of all positions in a “security class” or “product group” as determined by the custodial broker’s theoretical pricing model using multiple pricing scenarios.  These pricing scenarios are designed to measure the theoretical loss of the positions given changes in both the underlying price and implied volatility inputs to the model.  Clients participating in portfolio margin will be required to sign an agreement acknowledging that their security positions and property in the portfolio margin account will be subject to the client protection provisions of Rule 15c-3 under the Securities Exchange Act of 1934 and the Securities Investor Protection Act.  Clients will be subject to minimum equity requirements by not only the custodial broker but also the managing firm.

General Disclosures:  Any strategies discussed in this presentation, including examples using actual securities and price data, are strictly for illustrative and educational purposes only and are not to be construed as an endorsement, recommendation, or solicitation to buy or sell specific securities or strategies.

Investors should carefully consider the investment objectives, risks, charges, and expenses before investing in any investment product.  To obtain a prospectus containing this type of information as well as other important information, contact your custodial broker.  Please read the prospectus carefully before investing.  

You should discuss any/all implications of investing in such products with your custodial broker, financial adviser/advisor, and/or tax advisor.  Past performance is not indicative of future results.  

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