What I’m Watching This Week – 21 March 2016

The Markets (as of market close March 18, 2016)

After a fifth consecutive week of gains, both the S&P 500 and the Dow have finally surpassed their 2015 year-end closing values. The Dow gained 389 points to close up 2.26%, while the S&P 500 increased 1.35% over the prior week. In fact, each of the indexes listed here posted gains by last week’s end and are edging toward positive territory for the year. Late-week gains were likely influenced by the Fed’s decision to refrain from raising interest rates, at least until it meets again in April.

The price of crude oil (WTI) is clearly trending upward as the price increased again last week, closing the week at $39.35 a barrel, $0.86 ahead of the prior week’s closing price. The price of gold (COMEX) increased by last week’s end, selling at $1,256 by late Friday afternoon, up from the prior week’s closing price of $1,251.10. The national average retail regular gasoline price increased for the fourth week in a row, selling at $1.961 per gallon on March 14, 2016, $0.120 over the prior week’s price but $0.492 under a year ago.

Market/Index 2015 Close Prior Week As of 3/18 Weekly Change YTD Change
DJIA 17425.03 17213.31 17602.30 2.26% 1.02%
Nasdaq 5007.41 4748.47 4795.65 0.99% -4.23%
S&P 500 2043.94 2022.19 2049.58 1.35% 0.28%
Russell 2000 1135.89 1087.56 1101.67 1.30% -3.01%
Global Dow 2336.45 2287.17 2327.69 1.77% -0.37%
Fed. Funds rate target 0.25%-0.50% 0.25%-0.50% 0.25%-0.50% 0 bps 0 bps
10-year Treasuries 2.26% 1.98% 1.87% -11 bps -39 bps

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

Last Week’s Headlines

  • Following its March meeting, the Federal Open Market Committee decided to maintain the current target range for the federal funds rate at 0.25%-0.50%. On the plus side, the Committee noted that economic activity has been expanding at a moderate pace, with favorable growth in household spending, the housing sector, and the labor market. However, in maintaining the current interest rates, both the Committee and Chair Janet Yellen observed that business fixed investment and net exports have been soft, global economic and financial developments continue to pose risks, and inflation continues to run below the Committee’s 2.0% target rate.
  • An indicator of inflationary trends, producer prices for goods and services fell 0.2% in February, with goods decreasing a noteworthy 0.6%. According to the latest report from the Bureau of Labor Statistics, prices, less food, energy, and trade services, inched up 0.1% in February following a 0.2% gain in both December and January. For the 12 months ended in February 2016, final demand prices for all categories of goods and services remained unchanged. However, over the same period, prices, less food, energy, and trade services, rose 0.9%–the largest 12-month advance since a 0.9% increase in July 2015.
  • Looking at the prices for goods and services from the perspective of what the consumer is spending, retail and food services sales fell 0.1% in February from January’s revised total. However, compared to a year earlier, sales are up 3.1%. Nevertheless, consumer spending in 2016 has not gotten off to a strong start, especially following January’s revised retail sales figures, which fell 0.4% following a prior advance estimate of +0.2%. While relatively low gas prices have given consumers more money to spend, other economic factors may be influencing consumers to remain a bit cautious with their spending.
  • The Consumer Price Index (CPI) for February declined 0.2%, according to the Bureau of Labor Statistics. However, over the last 12 months, the index has increased 1.0%. The energy index, particularly the gasoline index (-13.0%), was the major cause of the seasonally adjusted decline in the all items index, more than offsetting increases in the indexes for food and for all items less food and energy (core CPI). In fact, the core CPI increased 0.3% for the month, the same increase as in January. While not overwhelming, gains in the core CPI, an indicator of particular interest to the Fed, continue to show some inflationary pressure as it inches toward the Fed’s target rate of 2.0%.
  • The industrial sector is still weak, but showing signs of gaining some momentum. The latest report from the Federal Reserve on industrial production reveals an overall decrease of 0.5% in February after increasing 0.8% in January, largely attributable to declines in utilities and mining. However, manufacturing production rose 0.2% after gaining 0.5% in January. Over the last 12 months, manufacturing production is up 1.8%. Capacity utilization for the industrial sector decreased 0.4 percentage point in February to 76.7%, a rate that is 3.3 percentage points below its long-run (1972-2015) average of 80%.
  • The latest report on the housing sector was a mixed bag, as new home construction starts increased 5.2% in February from a month earlier–the highest level since last September. Single family home construction increased 7.2% for the month, to its highest level since November 2007, while multifamily units (apartments and condominiums) gained only 0.8%. On the other hand, new applications for building permits dropped 3.1% in February–not a good omen for future home construction. Privately owned housing completions in February were 4.2% below the revised January estimate, but are 17.5% above the February 2015 rate.
  • Home builders’ collective opinion of the housing market hasn’t changed much in March from February, according to the National Association of Home Builders advance Housing Market Index (HMI). The HMI reading for March remained at 58–the same as February’s reading. A reading of 50 or better indicates builders generally view housing conditions as positive. However, this reading remains at its lowest level since May. According to NAHB Chairman Ed Brady, “the single-family market continues to make slow but steady progress. However, builders continue to report problems regarding a shortage of lots and labor.”
  • The latest Job Openings and Labor Turnover Survey (JOLTS) for January reveals that job openings rose to 5.5 million (260,000 more than December), while hires and separations (quits, layoffs, and discharges) decreased to 5.0 million and 4.9 million, respectively.
  • The March preliminary results for the University of Michigan’s Index of Consumer Sentiment show consumer confidence is easing due to increased concerns about prospects for the economy as well as the expectation that gas prices would inch upward during the year ahead. The latest index reading of 90.0 is 1.7 percentage points below February’s index reading and 3.0 percentage points behind the index for March 2015.
  • For the week ended March 12, there were 265,000 claims for unemployment insurance, an increase of 7,000 from the previous week’s revised level. The advance seasonally adjusted insured unemployment rate remained at 1.6%. The advance number for continuing unemployment insurance claims was 2,235,000, an increase of 8,000, for the week ended March 5.

Eye on the Week Ahead

The week begins with a focus on the housing sector, including the latest reports on existing home sales and new home sales. The week closes with the “third” estimate for the fourth-quarter 2015 GDP.