Market Strategy Radar Screen Weekly - March 28, 2016

“Moderate” Remains the Operative Word
In a slow-growth environment, right-sizing expectations could augur a pleasant surprise for investors

Housing prices, mortgage applications, the ADP Employment Change number as the week progresses along with regional manufacturing data (the Chicago PMI and the ISM Milwaukee) and the weekly initial jobless claims on Thursday will lead into the main event on Friday which will include job growth in March (non-farm payrolls) and the unemployment numbers (the headline number and the broader U6 unemployment gauge).
A survey of economists looks for a read of 208,000 jobs added in March (down from an unexpectedly high 242,000 jobs in February) and for headline unemployment to remain at 4.9%.   

Much hotter numbers than the aforementioned could cause a jump in market volatility with futures as of last week signaling market expectations for the Fed to raise rates near the end of April at around a 6% chance.  Fed funds futures as of last week were also pricing in only one 25 bps hike in 2016 with odds of a hike at 60.3% in September and 73.4% by December.
Fed-speak last week from four Federal Reserve regional presidents signaled that at least some influential voices differed in opinion with the markets’ implied view per futures pricing.  Comments by those Fed officials last week will likely add to the attention and weight given to this week’s data releases by market forces.
Last week’s Fed-speak from the St. Louis Fed’s James Bullard, Richmond Fed President Jeffrey Lacker, Atlanta Fed President Dennis Lockhart, and the Chicago Federal Reserve’s Charles Evans separately and in aggregate appeared to us to provide the market (unintentionally) the catalyst it seemed to be looking for to justify taking some profits from the recent rally off the table in the near term.  
The aforementioned Fed presidents appear to favor the Fed making further upward adjustments to its benchmark rate sooner than the market has been anticipating.  
Indeed, stocks gave back some of their gains last week from the rally that began after the market hit a low on February 11th.
Large-, mid-, and small cap stocks pared gains last week with the S&P 500, the S&P 400 (mid-cap) and the Russell 2000 (small caps) shedding 0.67%, 1.11% and 2.01%, respectively, by the market’s holiday-abridged close last Thursday.
Stocks also followed the price of oil and a broad group of other commodities lower last week as the dollar rallied, in large part on the thought that the Fed might find reason to raise its benchmark in the first half of this year as the economy improves.
From our perspective on the Market Radar Screen, we’d consider the last week’s respective “barks” from four outspoken Fed presidents to be worse than the Fed’s “bite” when it next meets.
Our expectations remain for the Fed to give substantial weight to a broad array of stateside economic data as well as give consideration to the condition of the global economy and th what the ramifications of an earlier than expected Fed hike might have for the dollar, the competitiveness of US multinationals, the stock and bond markets and the economy.
As a result, we persist in thinking that the Fed will likely delay tweaking its benchmark higher until the second half of the year and then raise the rate only once and by just 0.25%.
From our perspective on the Market Radar Screen, risks to growth at home and abroad remain embedded in the landscape, driven by technology which disrupts employment and wage growth as well as by lower barriers to entry to competition in a myriad of businesses across the globe, from mom and pop operations to multinational enterprises.
In such an environment, central banks are likely to stay on heightened alert for deflationary and disinflationary risks as reflationary efforts continue to be challenged by cyclical and secular trends driven by technology, globalization and demographics which keep a lid on  wages, prices of goods, services and commodities—around the world.
In such a landscape, interest rates and growth rates are likely to remain low for longer in a slow-growth environment. In such a scenario, “moderate” (as opposed to “robust”) will likely remain the operative word for the foreseeable future.
Quality dividend-paying stocks, which can provide cyclical exposure for upside potential, could find increased popularity with investors in such environs.

Stay tuned. 

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