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Party Like It's 1999?

| March 07, 2016
MPCA Weekly Market Update

Following the price of oil yet again, the S&P 500 ended the week auspiciously at 1999.99 (that is not a typo!) on Friday.  The Dow saw its first close north of 17,000 since the first week of January.  Not coincidentally, oil prices gained nearly 10 percent over the course of the week, rising more than $3 to finish near $36 per barrel.  Rising crude has helped fuel three straight weeks of gains in the market.  After beginning 2016 in a downward trend and returning -10.27% through February 11, the S&P has begun to claw back lost territory and is currently down a less discouraging -1.73% year-to-date.

The week brought more mixed economic data, continuing a pattern in place for months now.  Stocks were up early on Monday, but quickly set a downward trajectory as the S&P 500 Index returned -0.80%.  Negative economic news showed lower than expected data for both the Chicago Purchasing Managers (“PMI”) Index and January US pending home sales.  Financials and technology stocks led the charge on Tuesday as the S&P 500 index had its best day of the week with a 2.39% return.  Positive economic data showed higher than expected ISM manufacturing and January construction spending.

On Wednesday, better than expected ADP employment data helped stocks rise as the index returned 0.43% and energy extended its rally.  Stocks continued their grind upward on Thursday as the index returned 36 basis points on mixed economic data.  US initial jobless claims of 278K were higher than the consensus estimate of 270K and higher than the previous week’s 272K.

As is the case these days, the most highly anticipated news event at the start of a month is the Friday release of the previous month’s employment data, and last week was no exception.  Bears and bulls alike found ammunition for their convictions as nonfarm payrolls added 242,000, well above the 195,000 expected, sending the yield on the benchmark 10-year note to a one-month high. Despite solid employment gains in February, year over year wage growth took a hit, declining 2.2% from 2.5% in January.

We now have only a week or so until the Fed meets again to address how to proceed on interest rates.  No one really expects anything but a “hold” at this time, but the strong headline numbers in the US jobs market puts a perhaps stronger case for the US economy front and center.  Yet with 250 companies in the S&P 500 still to report earnings results, we continue to see an earnings recession in progress, with overall Q1 earnings growth expected to clock in at a miserable -9.3%.  Combined with the fact that, as noted above, even the strong jobs numbers came with a decline in wage growth, it is difficult for us to see a broad-based liftoff in equity markets any time soon.

Finally, the European Central Bank (ECB) meets this Thursday, and the world will be watching to see if it will lower interest rates further. In China, it was announced that growth expectations for 2016 are set between 6.5 to 7 percent. With little on the economic calendar this week here at home, markets will be more mindful of the global situation.  So, likely, will the Fed.