Market Perspective for March 18, 2016

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.

 

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