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Following Oil's Lead

| February 22, 2016
MPCA Weekly Market Update

Following the lead of crude oil prices and their counterparts in Europe, U.S. equity markets have opened strongly today.  This encouraging action, at least for the moment, comes on the heels of a solid 2.91% performance for the S&P 500 in last week’s holiday-shortened trading session. Oil rose for the week but is still no higher than two weeks ago despite a Saudi and Russia contingent agreement to cap production at January 2016 levels. Iran indicated it does not intend to participate in the agreement and crude oil production is expected to continue at record levels.

Currently the S&P trades at a P/E multiple of 17.28 and sports a dividend yield of 2.30%.  Beyond the rise in energy and metals-related shares, another bright spot last week was the S&P 500 Financials sector, which rebounded after weeks of underperformance and returned 2.56%.  

Minutes of the January meeting of the U.S. Federal Reserve’s Open Market Committee indicated caution among the members.  Specifically, the Committee stated that while they believe it would be premature to change their outlook for the U.S. economy, they also said they would closely monitor global economic developments, as well as oil and stock prices.  They discussed "altering earlier views of the appropriate path for the target range for the federal funds rate," given the recent tightening of global financial conditions.  Futures prices suggest that investors do not expect a further tightening of monetary policy by the Fed until well into 2017. 

Consumer prices in the U.S. were unchanged in January versus December, but the core Consumer Price Index, which excludes more volatile food and energy prices, rose 0.3%, its fastest rate in over four years.  If core inflation continues to edge up, the Fed could find itself between a rock and a hard place.  The choice between a hawkish stance on inflation and a dovish one to soothe financial markets would not be an easy one.  Some of us, including this writer, have lived through “stagflation.”  It was not pretty. 

The earnings situation continues to underwhelm.  According to Thomson Reuters I/B/E/S, as of February 16th, 77% of S&P 500 companies have reported earnings for the fourth quarter of 2015. The blended earnings growth estimate is negative 3.9% overall, but up a positive 2.4% excluding the earnings-challenged energy sector. Of those companies reporting, 68% have come in above analyst estimates, 11% have been in line with estimates and 21% have missed estimates. The blended revenue growth estimate is -3.6%, or 0.8% ex-energy. 

In the “market hates uncertainty” department, Great Britain weighs in with a strong statement from London’s Mayor Boris Johnson, who heads a list of prominent British names favoring exiting the European Union (EU). Of course, British currency has remained Pound Sterling and not the Euro, but the gesture is significant: Johnson is a part of Britain’s Conservative Party along with Prime Minister David Cameron, who has advocated staying with the EU. As one would expect, the British currency Pound Sterling is currently witnessing its worst day versus the U.S. dollar in a year, and headed to its biggest drop since 2010.