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Leigh Baldwin & Co.

112 Albany Street, Cazenovia, NY 13035 | Phone: (315) 655-2964 Toll Free: 1-800-659-8044

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The Week In Review

3/14-3/18/16

The stock market ended an upbeat week on a positive note as the S&P 500 (+0.4%) extended its win streak to five weeks and also managed to enter positive territory on a year-to-date basis (year-to-date +0.3%). Contributing factors to today's trade included leadership from the weary health care (+1.3%) and financial (+1.0%) sectors, a reversal in crude oil, and the inability to clear a key resistance level in the benchmark index.

 

Today's trading day began on a higher note as strength from the oil patch lent support to the broader market. However, this early support reversed as volatility increased in the oil trade. WTI crude came under pressure as investors took to profit taking in light of the week-to-date gain of 6.4% in the energy component. To be fair though, the first uptick of the year in the Baker Hughes U.S. Rig Count (387; prior 386) may have contributed to the air of selling pressure. WTI crude ended its day lower by 1.2% at $41.16/bbl.

 

Despite the tumble in crude, the major averages were able to maintain their footing in positive territory as heavyweight sectors outperformed. To that point, health care (+1.3%), financials (+1.0%), and industrials (+0.8%) were able to end the day with the largest gains. Meanwhile, the largest losses came from telecom services (-1.0%), utilities (-0.6%), and consumer staples (-0.2%). Interesting to note though, the two best performers of the day show the largest year-to-date declines with health care and financials down a respective 7.1% and 4.6% so far in 2016. Conversely, the two worst performers have the largest gains in 2016 with utilities and telecom services climbing a respective 12.4% and 13.3%.

 

Heavily-weighted health care (+1.3%) benefited from some broad-based strength as drug manufactures, drug wholesalers, and biotechnology all demonstrated relative strength. On that note, McKesson (MCK 158.31, +6.62) outperformed after the company announced its restructuring plan. Meanwhile, biotechnology trimmed its weekly losses. The iShares Nasdaq Biotechnology ETF (IBB 251.34, +4.25) ended its day higher by 1.7%, but finished with a loss of 4.1% over the week.

 

In the economically-sensitive financial sector, money center banks demonstrated relative strength as increases to JPMorgan Chase's (JPM 60.48, +1.73) and Bank of America's (BAC 13.79, +0.39) share buyback programs moved them to the top of the sector. The broader group traded higher in sympathy, extending its week-to-date gain to 1.5%.

 

The Dow Jones Transportation Average (+1.5%) continued its recent streak of outperformance as airlines topped the index, which benefited the broader industrial sector (+0.8%). Separately, large-cap Boeing (BA 133.96, +3.26) climbed 2.5% in the aerospace sub-group. To be fair though, the entire space is likely benefiting from recent weakness in the U.S. Dollar.

 

The U.S. Dollar Index (95.11, +0.35) ended its days near its high, but lost 1.2% for the week. The greenback managed to make up some ground against the yen and the euro today with the dollar/yen pair ending higher by 0.2% at 111.57 while the euro/dollar pair ended down 0.3% (1.1277).

 

Today's trade saw the S&P 500 (+0.4%) re-test a resistance level at 2050/52, but the index was unable to clear that level. As a result, the broader market ended off its best levels of the day with the Dow Jones Industrial Average (+0.7%) finishing ahead of the Nasdaq Composite (+0.4%) and the S&P 500 (+0.4%).

 

The Treasury complex traversed a narrow range today as the yield on the 10-yr note fluctuated between 1.87% and 1.89% before ending at the bottom of that range.

 

Today's participation was well above the recent average as options expiration boosted the number of shares traded on the NYSE floor to more than 2.147 billion.

 

Today's economic data was limited to the preliminary reading of the Michigan Sentiment Index for March:

 

In a bit of a surprise, the preliminary University of Michigan Consumer Sentiment Survey showed a dip in consumer sentiment to 90.0 from the final reading of 91.7 for February. The Briefing.com consensus estimate projected a slight increase to 92.2.

The downturn in consumer sentiment in March did not match at all with the strong upturn in investor sentiment in March, as expressed in quickly rising stock prices. The reason being, according to the report, is that consumers were worried more about prospects for the economy and had an expectation that gas prices would start moving higher during the year ahead.

The latter may have contributed to a pickup in consumers' expected change in inflation rates for the next year and next five years to 2.7%, respectively. In February, the expected inflation rate for both periods was 2.5%. In March 2015, however, the expected change in the inflation rate for the next year was 3.0% while the expected change in the inflation rate for the next five years was 2.8%.

Concerns about the economy and rising gas prices helped drive a downturn in the Expectations Index to 80.0 from 81.9, although the Current Economic Conditions Index also slipped to 105.6 from 106.8.

Notwithstanding the aforementioned concerns, consumers reportedly still felt good about their own personal financial situations as they did not expect the low growth to lead to an appreciable rise in the unemployment rate.

The report said consumers do not anticipate a recession, yet they no longer expect the economy either to do better than the 2.4% growth rate recorded in the past two years.

Monday's economic calendar will also be light with Existing Home Sales for February (Briefing.com consensus 5.37 million) set to cross the wires at 10:00 ET.

 

Week in Review: Chugging Along

 

The stock market continued its rebound off February lows, locking in its fifth consecutive weekly gain. The S&P 500 spiked 1.3% for the week and the advance lifted the benchmark index into positive territory for the year. As a result, the S&P 500 will enter the last full week of March with a year-to-date gain of 0.3%.

 

Two weeks ago, the market's main focus was on the European Central Bank and there was no shortage of central bank talk during this past week either. However, unlike the ECB, the Bank of Japan, Bank of England, Swiss National Bank, and the Federal Reserve all stuck to their guns and held the policy line.

 

The stock market saw little movement on Monday and Tuesday, but Wednesday afternoon featured a rally in equities after the Federal Reserve acquiesced to the market's desire and did not introduce another rate hike. The Fed held pat even though a 4.9% unemployment rate and a 2.3% year-over-year increase in core CPI offered data-based grounds to raise the fed funds rate or, at the very least, to strike a more hawkish-sounding tone regarding the glide path to normalization. Instead, the Fed struck a more dovish tone than what the market had expected and dialed back its own rate hike outlook. Specifically, the Fed's dot plot now shows that policymakers expect only two more rate hikes in 2016 after the previous forecast called for four.

 

According to the dot plot, the median fed funds rate at the end of 2016 is projected at 0.875% vs 1.375% in December while the median rate at the end of 2017 is projected at 1.9% versus 2.4% after the December meeting.

 

Furthermore, the Fed cut its 2016 growth forecast for the U.S. to 2.2% from 2.4% and adjusted its 2016 core PCE forecast to 1.4-1.7% from 1.5-1.7%. In addition to a dimmed view of domestic growth, the Fed mentioned that "global economic and financial developments continue to pose risks" after not expressing a similar concern in December.

 

Altogether, the Fed's newfound dovishness was music to the stock market's ear while the Dollar Index logged its third consecutive weekly decline, falling 1.1% to levels last seen in October.