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WEEKLY SECTOR PERSPECTIVE Equities climbed for a fifth consecutive week with recovering commodities. While an eclipse of previous highs is possible, choppy trading is likely as the rally consolidates. The […]
Equities and commodities experienced another strong rally in the wake of the Federal Reserve’s March meeting, extending gains for a fifth consecutive week.
As expected, the Fed, the Bank of England and the Bank of Japan left interest rates unchanged, though the Fed lowered its year-end forecast to two rate hikes. The Dow Jones Industrial Average and S&P 500 Index subsequently moved into positive territory for the year. Overseas markets also rallied to a lesser extent, despite the weaker U.S. dollar. Commodities were broadly higher as the renewed possibility of OPEC freezing output sparked a crude oil rally; the price of a barrel of West Texas Intermediate (WTI) closed the week over $41 per barrel.
Mortgage applications dropped last week as fewer people refinanced existing home loans, but February housing starts rebounded with a 5.2-percent increase to a seasonally-adjusted 1.18 million units. Positive manufacturing data indicated a 0.2 percent increase in domestic industrial output, exceeding the 0.1 percent many economists expected. Japanese machine orders improved an unexpected 15 percent in January when compared to the previous month. Eurozone industrial production also rose 2.1 percent, marking the largest increase in six years. Domestic retail sales were better-than-expected. The previous month’s initial report was revised lower to 0.4 due primarily to an adjustment in auto sales.
While the Fed left interest rates untouched, two more rate hikes are possible this year based on the Fed’s own year-end target Fed Funds rate of 1.0 percent. The pace is supported by Wednesday’s release of the Consumer Price Index (CPI). Excluding volatile energy data, the index showed a 0.3 percent increase in prices last month. The core CPI, scrutinized by the Fed when determining interest rates, rose 2.3 percent. The increase in inflation was the largest in almost four years. Initial unemployment claims remain well below past averages, signaling continued strength in the labor market. This also supports analyst expectations of further Fed tightening later in the year.
Dividend funds generally rallied following the Fed meeting. Rate sensitive utilities funds set new all-time highs, as did the defensive consumer staples sector. Technology, industrials and consumer discretionary shares also performed strongly and neared their all-time highs.
Oracle (ORCL) reported earnings per share (EPS) of $0.64 on revenues of $9.01 billion. While the company beat on EPS, revenues were slightly lower than consensus estimates. FedEx (FDX) beat expectations with EPS of $2.51 and revenues of $12.7 billion, fueled by holiday demand and online shopping. The company also increased its earnings estimates for the year, as strong economic growth and low fuel costs are working in its favor. Adobe (ADBE) also delivered a strong earnings report. The company’s digital media business unit grew 33 percent over the past year to $0.66 per share on revenues of $1.38 billion, beating consensus estimates.
SPY climbed above $200 in the past week, a positive sign for the short-term market. Shares spent most of 2015 between $210 and $200 per share and it may take time for the index to traverse this range before testing the all-time high.
IWM is hovering near $107. A clean upside break would require a rally of almost 20 percent to challenge its highs.
Utilities carried SDY to an all-time high. Dividend-paying sectors, such as consumer staples are also performing well.
On Tuesday, shares of Valeant Pharmaceuticals (VRX) plunged 50 percent on poor guidance and a delayed financial statement filing which could trigger a bond default. VRX has $30 billion in long-term debt, far exceeding the credit pressure of most biotech firms. While VRX is not a holding in any of the above funds, its losses sparked selling in some of the weaker biotech firms. These sectors have lagged the broader market to this point, but they are likely to lead the next phase of the rally once they close the gap.
WisdomTree Bloomberg USD Bullish (USDU) CurrencyShares Euro Trust (FXE) CurrencyShares Canadian Dollar (FXC) CurrencyShares Japanese Yen (FXY) WisdomTree Emerging Market Currency (CEW)
All three major central banks will have made their policy statements. The response thus far to the European Central Bank’s decision to increase asset purchases and cut interest rates to negative 0.40 percent has been positive for equities. Last week, stocks and the euro initially plunged on the ECB policy statement, only to reverse strongly over the course of the next day.
All the current trends remain intact, with emerging market currencies, resource currencies and the yen looking to move higher, while the dollar and euro are in trading ranges.
United States Oil (USO) SPDR Energy (XLE) FirstTrust ISE Revere Natural Gas (FCG) Global X Copper Miners (COPX) Market Vectors Coal (KOL) Market Vectors Steel (SLX)
Oil prices continued to gain ground in the past week, but the ascent has slowed before reaching the psychologically important $40 level. OPEC continues to discuss production freezes, but Iranian refusals to comply have stalled any real progress. A number of U.S. shale producers say they will ramp up production above $40 a barrel, but yesterday The Wall Street Journal reported many shale producers can’t increase production owing to large layoffs and investment cuts. Oil production is beginning to fall slightly, but inventories are still rising.
Energy related equities also enjoyed a rally in recent weeks and that move is consolidating. XLE is up about 20 percent from its January lows. FCG enjoyed a far larger rally in percentage terms.
Steel, copper and coal funds are at an increased risk for a pullback. These funds are heavily influenced by China’s economy and January and February data shows no end to the slowdown. Shares of coal producer Peabody Energy (BTU) fell more than 40 percent on Wednesday after the firm warned of bankruptcy. The chart below indicates the stock traded for more than $1300 per share (adjusted by reverse splits) at the peak in mid-2008.
All but one major equity sector rallied last week and no sector lost ground. Consumer discretionary and financials led, with the latter benefiting from rising interest rate expectations. Consumer shares were unfazed by weaker-than-expected retail sales in February.
Utilities and consumer staples pushed to new all-time highs with those gains, while consumer discretionary fund XLY and technology fund XLK are closing in on their all-time highs.
iShares iBoxx High Yield Corporate Bond (HYG) iShares iBoxx Investment Grade Corporate Bond (LQD)
Interest rates also continued to rally over the past week, though not to any detriment for HYG or LQD. Investors have grown more optimistic and are now more interested in the attractive yields available in investment grade bonds and high-yield debt. There’s still room for gains if credit risk continues to ease, even if interest rates rise.
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