This Spring has had no shortage of market-moving stories. Notable among them, The U.S. Dollar Index, which measures the U.S. Dollar vs a basket of other currencies, declined from 100 in early February to 93 in early May. This weakening of the dollar fueled gains in stocks, oil and commodities. We will have more on this in a future post. Speaking of oil, it has made a strong comeback off its February low of $27/barrel climbing to $49/barrel today. There are still significant supply hurdles that will have to be overcome for oil to avoid revisiting the $30's.
On to other topics...
The S&P 500 is back in a trading range it has seen twice before over the past year.
So what has kept the the S&P from breaking out of this trading range to the upside? Last August it was the Chinese currency devaluation that triggered a market sell-off and then in the first week of 2016 the Chinese devalued their currency again beginning another market fall below the trading range. Over the past few months the Chinese have taken back tight control over their currency so another devaluation in the coming months is less likely, though can't be ruled out.
Another key point- declining revenue and earnings over the previous four quarters have also kept the S&P from breaking out. Some analysts project that the 7% earnings decline seen in the first quarter was the low point and that companies will have a much stronger second half of the year. This has been projected for several years but has failed to materialize. That being said, there are CEOs who are optimistic.
The market focus over the next few weeks will once again be on the issue of whether the Federal Reserve will raise interest rates at their June meeting. Just in the past week market participants have placed the odds of a Fed rate increase from 4% to a 32% chance today. This shift began after Fed meeting minutes were released last Wednesday that showed Fed officials were much more open to a June interest rate increase than the market had previously anticipated. In addition to the Fed minutes numerous Fed officials have been talking about the need for 2-3 rate hikes this year. The Fed has put themselves in another position in which they need to follow through and increase rates at the June meeting to try and restore some of the credibility they have lost with the many flip-flops we have seen from them in the past few years.
The Fed claims to be data dependent, though it certainly has become much more market dependent under Janet Yellen. Looking at the data, first-quarter GDP was very weak at a .5% annual pace, first-quarter retail sales were poor and the April jobs report fell short of expectations. However, U.S. economic data has improved recently with a strong April retail sales number, good industrial numbers and April new home sales which rose to the highest level since 2008.
To reiterate our position, the 0% interest rates put in place during the 2008 financial crisis were for emergency measures and the Fed made a mistake waiting until December 2015 to begin the process of increasing rates. The economy was strong enough in 2013 & 2014 to begin slowly increasing rates from 0% to 1%, still a very low rate but off the emergency level. The Fed didn't do that and now has found themselves with a more challenging job.
Every few years around this time market volatility has picked up and all of us have been subjected to hearing endless media conjecture about Greece and the question of will they or won't they be bailed out. The market won't be fretting over a Greece bail out this year because it has been taken off the table. From the WSJ:
"Eurozone finance ministers and the International Monetary Fund patched together a deal in the early hours of Wednesday that clears the way for fresh loans for Greece and sets out how the country could get debt relief in the future.
The ministers, who held an 11-hour meeting in Brussels, said Greece had done what was necessary to unlock the next slice of financial aid, concluding a review of its bailout that was delayed for months. The new payouts will save Greece from defaulting on big debt redemptions to the IMF and European Central Bank in July."
What happened here is the politicians in the EU didn't want to have this battle with Greece right now, so they gave Greece $11 billion so Greece wouldn't default on previous bailout loans. Greece is in a hole they will not be getting out of and this move is another classic illustration of kicking the can down the road.
Going forward all eyes will be on the Fed and their June decision. Based on the Fed minutes, unless the economic data in the coming weeks is just dreadful, they have put themselves in a situation where a rate increase is needed for multiple reasons, their credibility being the most important. Regardless of what the Fed decides to do, we will be paying attention.