Major stock indices eclipsed two major psychological thresholds today as the Dow Jones Industrial Average traded above 17,000 and the S&P 500 traded over 2,000 late in the session on Friday. U.S. equity markets have rebounded over 9% from their lows just 3 weeks earlier, albeit the major indices are still slightly negative for the year. The recent rebound can be attributed to continued improvements in the macroeconomic data (jobs, manufacturing, consumer spending, etc.) and the reversal in oil prices. Many of the doomsayers are having a hard time trying to sell their story of a global recession when the fundamental data continues to suggest otherwise.
One of the major catalysts of the recent market reversal has been the rebound in oil prices. West Texas Intermediate (WTI oil) hit a low of $26/barrel just a few weeks ago and closed today above $36/barrel. A month ago, many experts were predicting that oil would collapse further and some even predicted prices would drop to $10/barrel or lower. While these predictions were taking place we maintained that a temporary price drop was possible, but it was very unlikely to occur for any prolonged period of time as the underlying fundamentals just did not support this prediction. There are still reasonable concerns surrounding the supply side of the oil equation, but the demand side should stay relatively strong for the foreseeable future. Saudi Arabia, Venezuela, Qatar and Russia have already agreed to freeze production levels for 2016 and an outright cut to production is still very possible. According to Nigerian Minister of State Petroleum Resources Emmanuel Ibe Kachikwu, key members of OPEC intend to meet with other producers in Russia later this month to renew talks on the freeze deal. Kachikwu also stated that the talks will cause a “dramatic price movement” when the gathering takes place. Oil price volatility will remain a key catalyst for equity markets in the near term and we will continue to monitor these developments closely over the next few months.
U.S. Adds 242,000 Jobs in February
The Bureau of Labor Statistics announced this morning the U.S. added 242,000 jobs in February, well ahead of the 190,000 consensus estimate and higher than even the most optimistic estimate. The prior two months were revised upward by 30,000 jobs as well. The unemployment rate remains unchanged at 4.9%. The strongest gains were in the health care, restaurants, retail, education, and construction sectors. The manufacturing sector declined and the mining sector (which includes the oil and gas industry) again shed jobs and has now lost 171,000 jobs since its peak level in September of 2014.
These strong numbers were overshadowed somewhat by a drop of 0.1% in average hourly earnings from January. This pulled the year-over-year wage growth down to 2.2%, though there is certainly more to that data point. Payroll processing firm ADP stated that full-time employees at the same company for more than one year saw an average of 4.1% wage growth in the fourth quarter of 2015 and it is reasonable to infer that this group is on the same “track” this year. The average workweek for private-sector workers fell by 0.2 hours to 34.4 hours and is the shortest workweek in over two years.
Investors seem to be interpreting the jobs data as “good news is good and bad news is also good”. What we mean by this is that investors are cheering the headline number that eclipsed almost all expectations and provides further evidence that the U.S. economy is not slipping into a recession (good news is good). On the other hand, the bad news was that wage growth decreased slightly and this suggests that inflation is not a concern and therefore it is more unlikely that the Federal Reserve will increase the Fed Funds rate when they meet next on March 15th and 16th (bad news is good). Investors are still trying digest how potential interest rate increases will effect equity market returns in the long run and thus far the consensus seems to be that prolonged lower rates will be positive for equity returns. We have discussed this in great detail in previous emails and the empirical data suggests that we have a long way to go on interest rate increases before they will have a negative impact on equity returns.
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