Large-cap stocks slid into Wednesday of this week, continuing a corrective that began on March 3. Shares bounced strongly on Thursday, helped by a larger than expected drop in jobless claims. Payroll and unemployment data continue to be the brightest spots in economic reports. Small- caps stocks marched higher throughout the week, as the sector continues to outperform in 2015 thanks to the strong U.S. dollar.
Retail sales were solid in February. Sales increased 1.7 percent year-on-year, but were down 0.6 percent from January. The dip from January was primarily due to bad weather as the category that includes online retailers increased. Although the retail report was good, the dip in sales will hurt the current quarter’s GDP growth rate. The Atlanta Federal Reserve branch’s updated forecast is down to 0.6 percent growth this quarter.
The drop in the forecasted GDP came despite an increase in wholesale inventories in January. Increases in inventory are positive for GDP, while decreases in inventory are negative. On the other side, producer prices were weak, with producer prices falling 0.5 percent versus an expected increase of 0.3 percent.
West Texas Intermediate Crude hit $45 again on Friday morning, $1 above its low for the year as oil inventories climbed again. At the current pace of inventory growth, available storage facilities will max out in early summer. If that happens, inventory demand will cease and spot prices will likely resume their downward slide.
The other significant story of the week was the drop in the euro and the rise of the U.S. dollar. The U.S. Dollar Index broke through 100 this morning, the highest level since 2003. The pace of the dollar’s rise has been historic. It took more than 4 years for the dollar to fall from 100 to 80, but less than nine months for the dollar to rally from 80 to over 100. The euro was at $1.05 this morning and technical traders consider this the key price because it is the bottom of a long-term uptrend. From the viewpoint of technical traders, if the euro breaks the $1.05 level, it confirms the long-term breakout in the dollar.
With stocks mixed this week, only one major S&P 500 sector witnessing gains was the financial sector. Investors shifted their rate hike expectations forward in time and the Fed signaled a shift via Jon Hilsenrath of the The Wall Street Journal. The headline of his piece says it all: Fed Likely to Remove ‘Patient’ Barrier for Rate Increase as Soon as June. The patient language tells investors a rate hike is not coming in the next two meetings; if it is removed at next Wednesday’s meeting, the Fed could raise rates in June at the earliest or at any subsequent meeting. Banks benefit from higher interest rates because it makes lending more profitable and some investors are jumping into the sector ahead of the expected rate hikes.
Rate sensitive utilities and real estate stocks didn’t drop though. Utilities held up well over the week relative to the broader market, while the REIT sector outperformed the S&P 500. Both sectors had been selling off due to higher long-term interest rates, but did better as the 10-year Treasury yield fell. One possible confounding factor is that utilities, real estate and financials are all heavily exposed to the domestic economy. Investors may be bidding up all of these sectors as a response to the rising dollar, which could cut into exports. The two worst performing sectors this week were energy and the high exporting technology sector.
Small caps were also up this week, in absolute terms. The Russell 2000 Index gained 1.57 percent through Thursday’s close versus the 0.26 percent drop in the S&P 500 Index. Large multinationals in the S&P 500 will see their earnings dip due to the strong dollar, while small cap stocks are relatively insulated because they heavily rely on the domestic economy.