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Early Rally, Weak Finish

| May 16, 2016
MPCA Weekly Market Update

Last week the S&P 500 Index rallied early, but losses on Wednesday, Thursday, and Friday negated the early gains. The index posted a -0.44% return for the week and is down -0.77% through the first half of May. For the year, the index has gained 0.96%, just slightly better than breakeven. Monday started off well as health care stocks led the market to modest gains for the day, although energy and mining stocks were a drag on the index due to weakness in oil and gold prices. Tuesday markets opened higher as strong news out of Asia pushed up European markets. Crude erased its Monday losses and stable gold prices lifted mining stocks. 

The market opened lower Wednesday after disappointing earnings releases from retail and media companies. European markets were also weak as investors moved from stocks to commodities. On Thursday, the influential consumer sector rebounded after dragging down the indexes the previous day, and the overall market was mostly flat for the day. Strong earnings from a leading semiconductor producer boosted the technology sector. Declines continued Friday, albeit counterintuitively, on strong economic data as the S&P 500 Index fell -0.84%. Retail sales had their biggest gain during the past year as purchases climbed 1.3% from the previous month, compared to the median forecast of a 0.8% gain, as surveyed by Bloomberg.

Market breadth was unimpressive, as seven of the ten economic sectors had negative performance for the week. The utilities sector, generally considered a defensive shelter, was the best performer with a 1.09% return. Fellow defensives consumer staples and health care followed with 0.05% and 0.01% returns, respectively. Economically sensitive areas of the economy lagged noticeably on the week. Consumer discretionary, with a -1.38% return, was the worst performer, followed by financials and industrials, which returned -1.05% and -0.96%, respectively.

Meanwhile, global equities edged modestly higher on the week. The Chicago Board Options Exchange Volatility Index (VIX) fell to 14.23 from 15.6 a week ago, while the yield on the 10-year US Treasury note declined to 1.75% from 1.76%. West Texas Intermediate crude prices rose to $46.31 from $44.35 last week, and global Brent crude prices rose to $47.65 from $45.03. Importantly, Ali al-Naimi was relieved of his duties as Saudi oil minister after more than two decades on the job. The eighty-year-old minister was replaced by former Saudi Aramco CEO and current chairman Khalid al-Falih, who is seen as continuing Saudi Arabia's present policy of maintaining its share of the global oil market, even if it leads to lower prices.

Finally, if any among our readers think that negative interest rates could not happen here in the US, the following may cause reconsideration. In a letter to a US congressman, US Federal Reserve Chair Janet Yellen said negative interest rates cannot be ruled out as a possible policy tool in an adverse economic scenario. However, she stated that the Fed would use other tools at its disposal before resorting to negative interest rates. Yellen said the central bank is trying to learn as much as possible from recent actions by the Bank of Japan and European Central Bank.