What started out negative turned to positive by the end of the day. Overnight, WTI (West Texas Intermediate) crude prices fell more than 6.5% after the Doha talks to reach an agreement to freeze oil output ended in failure. Then came news out of Kuwait of an oil-worker strike and a cut in Kuwaiti oil production, allowing crude to settle off its lows for the day and U.S. equity markets to recover from early morning losses to end higher as well.
Keep in mind that Kuwait disruption in output is only a temporary phenomenon, as those volumes will be back on the market in the coming days. The key question on the supply side of the oil equation is the evolving production trend from U.S. oil fields and other non-OPEC sources like the North Sea. U.S. production is steadily coming down, but the pace of the decline has not been fast enough to bring global supply-demand dynamics in balance.
Last week the S&P 500 index returned 1.65%, regaining lost ground from the previous week, with economic data out of China receiving some of the credit. Chinese industrial production, retail sales and fixed asset investment all rebounded in March following disappointing reports in February. Analysts noted that last month's weak numbers may have been a function of the extended Lunar New Year holiday period. Gross domestic product for the first quarter of the year rose 6.7%, as expected.
Here at home, though the S&P 500 was down 10.27% through February 11, it currently sits in positive territory for 2016 with a 2.47% YTD return. To recap last week, on Tuesday oil prices jumped 4.48% on comments from Saudi Arabia and Russia, which helped energy stocks lead the way up as the index returned 0.97%. Stocks continued climbing on Wednesday as the index opened up and increased to the close returning 1.02%. Though month-over-month retail sales for March came in lower than expected, a positive earnings release from JPMorgan Chase & Co. helped build strength in financials and equities in general.
On Thursday, U.S. initial jobless claims of 253K were lower than the consensus estimate of 270K and lower than the previous week’s 267K. The market was flat on the day, with Wednesday’s gain perhaps pricing in the decent news. Mixed economic news and lower than expected consumer sentiment kept stocks flat again on Friday. Crude oil closed the week at $40.36 a barrel, increasing 1.61% from the previous week’s close. The financial sector was the best performing sector with a 3.97% return.
We have been following the drama in Brazil, with a belief that crisis can be a precursor to badly-needed reform. On Sunday, the lower house of Brazil's congress voted for impeachment, a crushing defeat for President Dilma Roussef. Well over the required two-thirds majority voted to send the case to the Senate, where a majority vote would launch the impeachment process. A yes vote there would temporarily remove Rousseff from office. The Senate has 180 days to make a decision once the process begins.
This week we are entering the heart of the Q1 earnings season, with more than 100 S&P 500 members coming out with results this week and more than 170 index members reporting next week. This morning, Morgan Stanley became the latest major broker whose results were notably below the year-earlier level, but they were nevertheless not as bad as many in the market expected them to be. This trend of actual results coming in a better relative to extremely low expectations has become a recurring theme this earnings cycle, particularly with the banks.
For the S&P 500 index as a whole, we now have Q1 results from 41 index members that comprise about 11% of the index’s total market capitalization. Total earnings for these 41 index members are down -9.4% from the same period last year on -0.7% lower revenues, with 75.6% beating EPS estimates and 53.7% beating revenue estimates. In a related note, last week the International Monetary Fund (“IMF”) trimmed its global growth outlook. They project the global economy to grow 3.2% in 2016 and 3.5% in 2017. The prior forecast was for 3.4% growth in 2016 and 3.6% in 2017. As we have stated in the past, it will take more than earnings and economic growth mediocrity to propel the equity markets higher in any kind of sustained way.
Finally, today marks the deadline for filing 2015 year tax returns (assuming no extensions) with the federal government. We add our thanks to many of yours to see this day pass. Hopefully things will go well between all of our readers and the IRS!