/perspectives/weekly-viewpoint/dovish-fed-sends-market-flying

'Dovish' Fed Sends Market Flying

The major market indices finished the week higher with the S&P 500 gaining for the fifth consecutive week, the longest winning streak since late October/early November. Both the Dow and S&P also managed to erase year-to-date losses.

March 21, 2016    |    By Mike Schwager

Performance for Week Ending 3/18/2016:

The Dow Jones Industrial Average (Dow) gained 2.26%, the Wilshire 5000 Total Market IndexSM (Wilshire 5000SM) added 1.4%, the Standard & Poor’s 500 Index (S&P 500) tacked on 1.35% and the Nasdaq Composite Index (NASDAQ) finished up 0.99%. Sector breadth was positive with 9 of the 10 S&P sector groups finishing higher.  The Industrials sector (+3.41%) led the way higher followed by Energy (+2.48%) and Materials (+2.42%).

Index* Closing Price 3/18/2016 Percentage Change for Week Ending 3/18/2016 Year-to-Date Percentage Change Through 3/18/2016
Dow 17602.30 +2.26% +1.02%
Wilshire 5000 20981.70 +1.40% +0.01%
S&P 500 2049.56 +1.35% +0.27%
NASDAQ 4795.65 +0.99% -4.23%

*See below for Index Definitions

MARKET OBSERVATIONS: 3/14/16 – 3/18/16

The major market indices finished the week higher with the S&P 500 gaining for the fifth consecutive week, the longest winning streak since late October/early November. Both the Dow and S&P also managed to erase year-to-date losses. The “gloom and doom” narrative that pervaded the markets during the first six weeks of the year appears to be fading as energy and commodity prices have rebounded, concerns over a US recession have diminished and confidence that the Federal Reserve (Fed) will take a very gradual approach to tightening monetary policy has increased. While the market may be in need a breather following the recent run, seasonals will remain a tailwind for the market through the end of April.

As the Consumer Goes, so Goes the US Economy: The prospects for the US economy falling into recession always appeared relatively low. While the manufacturing side of the economy has been lackluster, recent signals from the regional Fed manufacturing indices suggest the worst may be behind. The consumer side of the economy (which represents about two-thirds of economic growth) remains in reasonably good shape.  The labor markets continue to improve, wages are trending higher, consumers should continue to benefit from low gasoline prices, and lending rates should remain relatively low for the foreseeable future. In addition, weather trends this year could have a positive impact on economic growth. We are in the midst of an El Nino weather pattern and historically the warmer weather trends that come with El Nino have had a positive impact on economic growth. If anything, the risk to economic growth may be skewed to the upside.

Lower for Longer: Last week’s much anticipated Federal Open Market Committee meeting sparked a fire under risk assets and reignited a risk-on mentality. As expected, the Fed left policy unchanged but surprised the markets with a larger than expected downward adjustment to the forward rate path.  The Fed’s updated “dot plot” now suggests only two rate hikes this year down from its December projection of four.

The Fed’s macro outlook was generally balanced with economic growth expected to expand at a moderate pace and labor markets expected to continue to strengthen. On the flip-side, inflation is not expected to hit the 2% threshold until sometime in 2018. The committee also noted that global economic and financial developments still pose a risk, hence their cautious approach to higher rates.

US Data Remains Resilient: Most data reports over the past couple weeks have been meeting or beating expectations, suggesting fears of recession earlier this year were overdone. Last week we saw the Conference Board’s Leading Economic Index edged up 0.1% in February, the first increase in three months. The Philly Fed Index jumped 15.2 points in March, the most since November 2014, as factory activity in the region expanded for the first time in seven months. The number of job openings (JOLTs report) rose 4.9% in January to 5.541 million, the third highest level on record. Elsewhere, the Commerce Department reported that housing starts during the month of February rose 5.2% to an annualized pace of 1178K units, modestly ahead of economist’s expectations. On a year-over-year basis housing starts are up over 30%. The New York Fed reported that manufacturing activity in the Greater NY area expanded for the first time in 8 months. The Empire Index rose to 0.6 (readings above 0 signal expansion) from -16.6 during February.  The “guts” of the report were also strong with the forward looking new orders component jumping to +9.6 from -11.6 last month while the shipments component rose to +13.9 (from -11.6).

The Week Ahead: The calendar will be relatively light during the holiday shortened week (note: financial markets will be closed on Friday in observance of Good Friday). On the data front, focal reports include February existing home sales, February new home sales, February durable goods orders and the second revision to fourth-quarter GDP. Nine members of the S&P 500 will report earnings during the week including Dow component Nike on Tuesday. The Fed speaking calendar will be active, as is typical following a Federal Open Market Committee meeting. Fed Heads slated to speak during the week include Richmond president Jeffrey Lacker, Atlanta president Dennis Lockhart, St. Louis president James Bullard, Chicago president Charles Evans and Philadelphia president Patrick Harker. Other events of interest include a handful of US election primaries and the productivity reducing NCAA basketball tournament.

Definitions

The Dow Jones Industrial Average is a price-weighted average of 30 blue-chip stocks that are generally defined as the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.

Wilshire 5000 Total Market IndexSM represents the broadest index for the U.S. equity market, measuring the performance of all U.S. equity securities with readily available price data. The index is comprised of virtually every stock that: the firm's headquarters are based in the U.S.; the stock is actively traded on a U.S. exchange; the stock has widely available pricing information (this disqualifies bulletin board, or over-the-counter stocks). The index is market cap weighted, meaning that the firms with the highest market value account for a larger portion of the index.

Standard and Poor's 500© Index is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.

The NASDAQ Composite Index is a broad-based capitalization-weighted index of stocks in all three NASDAQ tiers: Global Select, Global Market and Capital Market. The index was developed with a base level of 100 as of February 5, 1971.

Indices do not include any expenses, fees, or sales charges, which would lower performance. Indices are unmanaged and should not be considered an investment. It is not possible to invest directly in an index.

The individual companies mentioned in this piece were for informational purposes only and should not be viewed as recommendations.

The comments should not be construed as a recommendation of individual holdings or market sectors, but as an illustration of broader themes. This document contains forward-looking statements about various economic trends and strategies. You are cautioned that such forward-looking statements are subject to significant business, economic and competitive uncertainties and actual results could be materially different. There are no guarantees associated with any forecast and the opinions stated here are subject to change at any time and are the opinion of the individual strategist. Information in this report does not pertain to any investment product and is not a solicitation for any product. This material has been prepared using sources of information generally believed to be reliable. No representation can be made as to its accuracy.


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