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Doves flying on Capitol Hill?

| February 16, 2016
MPCA Weekly Market Update

Financial markets were closed yesterday in honor of the Presidents Day holiday. We hope you were able to take some time and give thanks for those who step up and serve in (and run for) this often thankless role.  That said, if the parking lot at the Northgate Mall was any indicator, the “markets” there were open and bustling – bucking the fact that U.S. consumer sentiment fell to a four-month low in February to 90.7 from January’s reading of 92.0. Instead, it looked more like January, in which we saw U.S. retail sales grow 0.2%. Core retail sales were up a more impressive 0.6% for the month on the heels of increased wage growth.

Driving consumer sentiment lower is most likely the continued turbulence in the markets. During a whipsaw week, the S&P 500 Index returned -0.7% and has returned -8.5% year-to-date – a number that is hard for even the most casual investors to ignore completely. On Thursday, the S&P 500 closed near 1,829 – the lowest level since April 2014. Then the index rallied over 35 points on Friday to finish the week at 1,865.  Within the equity markets, U.S. earnings season continued and, according to Bloomberg, nearly two-thirds of the companies have announced their quarterly results. More than 75% of companies have beat earnings expectations but less than half have bested sales expectations.

As the equity markets churned in a generally negative direction, U.S. Treasury yields predictably finished lower for the week as well.  On Tuesday, the yield on the 10-yr U.S government note fell to a one-year low (closing at 1.74%) while the 10-yr Japanese note fell below zero for the first time on record, as concerns over the global economy have increased demand for safe-haven assets.  Yields continued to fall on Wednesday as Federal Reserve Chairwoman, Janet Yellen, took to Capitol Hill and expressed a generally dovish tone. Investors’ rate-hike expectations dimmed in light of her testimony, as she even threw in a suggestion that the central bank could potentially turn to negative interest rates.  She cited that the Fed has been surprised by the swings in oil prices and current strength of the dollar, and noted that a strong dollar and high interest rates for riskier borrowers could negatively impact the domestic economy. (The potential implications of negative rates is perhaps a topic for another post)

As investors digested these dovish remarks, the U.S. Dollar posted steep losses – with the Euro soaring 1.5% against the USD, reaching a mark not seen since October 2015. The Japanese Yen rallied 2.1%, as markets have essentially shrugged off the Bank of Japan’s negative interest rate policy.

As we conclude, no commentary these days seems complete without mention of oil. Despite many wanting to call a bottom in oil prices, volatility continued.  West Texas Intermediate Crude tumbled to a 12-year low as supplies at Cushing, Oklahoma ("The pipeline crossroads of the world") hit a fresh high. The International Energy Agency continued to forecast oil prices staying “lower for longer,” a contrast to the late-week news of a possible deal to cut oil supplies. 

At MPCA, as we continue to monitor the markets and economy closely, we are seeing a deterioration not seen in many years across many of our key indicators. We have taken defensive measures in the portfolios over the past few months, and may take a more significant move in our next portfolio adjustments.  We will continue to be disciplined in the use of our investment models, believing that they offer the best opportunities to protect on the downside while capturing opportunities on the upside.  As always, we invite your questions, concerns, and suggestions.