Dow, S&P hit new highs
The first week of March began with the Dow and S&P 500 posting new nominal highs while the NASDAQ closed above 5,000 for the first time since 2000 when the dot-com frenzy was in full swing.
But all three indexes tumbled March 6 after the government released yet another encouraging jobs report, reminding investors that the era of easy money ushered in by the Federal Reserve will come to an end sooner or later — and perhaps sooner. At the same time, the yield on the 10-year Treasury climbed to 2.239 percent, its highest level in 2015. The strengthening dollar hit an 11-year high against the euro.
The Labor Department March 6 announced that the economy added 295,000 jobs in February, well above the forecast of 230,000, while the jobless rate calculated from the separate household survey fell from 5.7 percent to 5.5 percent, its lowest level since May 2008. It was the 12th month in a row that at least 200,000 have been added, the best run since 1995. However, wage growth stalled, up just 2 percent from a year earlier after rising 2.2 percent in January, indicating that many of the new jobs may be low-paid positions. Though the labor force participation rate fell to 62.8 percent from 62.9 percent it’s still stuck at where it was in the 70s. Even so, investors thought the numbers might be good enough to get the Fed to advance its timetable for cutting its benchmark rate, as its range for “full employment” is 5.2 to 5.5 percent. Some analysts now expect the word “patient” to be dropped when the Fed meets mid-month.
China’s Premier Li Keqiang’s set the GDP target for 2015 at 7 percent, its lowest level in more than 15 years, and down from last year’s target of 7.5 percent. The government also plans to carry a larger budget deficit of ¥1.62 trillion ($258 billion) this year, about 2.3 percent of GDP, as it increases its stimulus to offset the economic slowdown.
Draghi is upbeat
Keeping the threat of deflation front and center; core inflation, less food and energy were up only 0.6 percent. Still, with its bond-buying program set to commence, the European Central Bank’s President Mario Draghi predicted that both the eurozone’s struggling economy and stubbornly low rate of inflation will benefit (in January, the ECB announced it would begin buying €60 billion in bonds and other debt every month). Speaking in Cyprus, Mr. Draghi said, “Our monetary policy decisions have worked.” Based on that optimism, the bank raised its forecast for GDP growth in 2015 from 1 percent in December to 1.5 percent, though the target of 2 percent inflation is not expected to be reached until 2017 at the earliest. The ECB left its benchmark rate unchanged at a record low, as did the Bank of England.
Greece has delivered a more detailed report on how it will earn the bailout money it needs to pay its debts, including how it will catch tax evaders and battle corruption. According to The New York Times, proposed measures include using citizens and tourists to trap tax dodgers.
U.S. banks pass stress test
In the latest round of the Fed’s stress tests for the nation’s 31 largest banks, they all showed that they could weather a financial crisis. This was the first time since the tests began in 2009 that every bank exceeded the Fed’s prescribed capital thresholds.
Winter weather bites car sales
Given the recent run of bad weather in the eastern half of the U.S., car sales in February were up only 5.3 percent from a year earlier to 1.26 million, according to Autodata. In fact, it was only because last February’s numbers were so bad, also because of wicked weather, that sales were up year-to-year. Toyota led the way, with sales rising 13.3 percent, while Fiat Chrysler’s rose 5.6 percent and GM’s 4.2 percent. Ford’s sales slipped into the red, off 2.0 percent.
The trade gap narrows
The trade gap declined 8.3 percent to $41.75 billion in January, the Commerce Department said. In a double whammy, exports fell 2.9 percent because of a stronger dollar, while imports were off 3.9 percent because of reduced demand for foreign oil and the labor slowdown at West Coast ports.
In other news, the Fed said consumer borrowing rose $11.6 billion in January, the smallest increase since November 2013, though total borrowing climbed to a new high of $3.33 trillion, up 6.9 percent from a year earlier. The Institute for Supply Management (ISM) Manufacturing Index fell to 52.9 in February from 53.5 the month before, but it remained above 50, which indicates expansion, for 29 straight months. The ISM’s Services Index rose to 56.9 in February from 56.7 in January. Factory orders fell 0.2 percent in January according to the Commerce Department, but orders for non-military capital goods excluding aircraft, a closely-observed metric, were up 0.5 percent. Construction spending dipped 1.1 percent in January and nonfarm productivity was off 2.2 percent. The government also reported that personal income rose 0.3 percent in January to $50.8 billion, while the Personal Consumption Expenditures Price Index fell 0.2 percent to $18.9 billion. Real PCE, however, was up 0.3 percent. First-time jobless claims were up 7,000 to 320,000, while the four-week moving average climbed 10.25 percent to a six-week high of 304,750.
Apple joins the Dow
Finally, Apple, the largest company in the world, as measured by its $740 billion market value, will join the Dow on March 19, replacing AT&T.
A look ahead
As the countdown to the Fed’s next meeting begins, investors will bide their time weighing this week’s releases, which will include the latest on small business optimism, wholesale and business inventories, retail sales, the Producer Price Index and consumer sentiment.
The opinions expressed are as of the date stated on this material and are subject to change. There is no guarantee that the forecasts made will come to pass. This material does not constitute investment advice and is not intended as an endorsement of any specific investment or security. Information and opinions are derived from proprietary and non-proprietary sources. Sources may include Bloomberg, Morningstar, FactSet and Standard & Poors.
All investments carry some level of risk including the potential loss of principal invested. Indexes and/or benchmarks are unmanaged and cannot be invested in directly. Returns represent past performance, are not a guarantee of future performance and are not indicative of any specific investment. No investment strategy can guarantee a profit or protect against loss. Although stocks have historically outperformed bonds, they also have historically been more volatile. Investors should carefully consider their ability to invest during volatile periods in the market. The securities of small capitalization companies are subject to higher volatility than larger, more established companies and may be less liquid. With fixed income securities, such as bonds, interest rates and bond prices tend to move in opposite directions. When interest rates fall, bond prices typically rise and conversely when interest rates rise, bond prices typically fall. This also holds true for bond mutual funds. High yield bonds and bond funds that invest in high yield bonds present greater credit risk than investment grade bonds. Bond and bond fund investors should carefully consider risks such as: interest rate risk, credit risk, liquidity risk and inflation risk before investing in a particular bond or bond fund.
The Dow Jones Industrial Average Index® is a price-weighted average of 30 blue-chip stocks that are generally the leaders in their industry. It has been a widely followed indicator of the stock market since October 1, 1928.
Standard and Poor’s 500 Index® (S&P 500®) is a capitalization-weighted index of 500 stocks. The index is designed to measure performance of the broad domestic economy through changes in the aggregate market value of 500 stocks representing all major industries.
Standard & Poor’s offers sector indices on the S&P 500 based upon the Global Industry Classification Standard (GICS®). This standard is jointly maintained by Standard & Poor’s and MSCI. Each stock is classified into one of 10 sectors, 24 industry groups, 67 industries and 147 sub-industries according to their largest source of revenue. Standard & Poor’s and MSCI jointly determine all classifications. The 10 sectors are Consumer Discretionary, Consumer Staples, Energy, Financials, Health Care, Industrials, Information Technology, Materials, Telecommunication Services and Utilities.
The NASDAQ Composite Index® Stocks traded on the NASDAQ stock market are usually the smaller, more volatile corporations and include many start-up companies.
NASDAQ – National Association of Security Dealers Automated Quotations. The NASDAQ is a computer-operated system owned by the NASD that provides dealers with price quotations for over-the-counter stocks.
The 10-year Treasury Note Rate is the yield on U.S. Government-issued 10-year debt.