Everyday, Everyday I Have the Blues
By John Stoltzfus,
Chief Investment Strategist
Trend Analysis
Market Strategy Radar Screen Weekly March 13, 2017
In this article:
- Last week’s drop in the price of oil to us was not a signal that the markets sensed a whiff of economic weakness but rather a sign that the oil market had come around to acknowledging the increase stateside in rig count (up over 17% year to date and up nearly 60% in the last 12 months)…
Doing What Comes Naturally
As the Federal Reserve positions itself to move ahead with its plans to normalize interest rates, markets (naturally) pause to reflect, rotate and fluctuate
No matter how well telegraphed the Fed’s intentions may be about the process of interest rate normalization, or how unsurprising a decline in the price of oil should be based on what’s been going on in the oil patch stateside, there’s always room for drama in the markets. In our experience the key is not to get too caught up in the day-to-day drama or distracted by the noise but rather to stay focused and keep the eye on the ball.
With February’s non-farm payroll number (surprising to the upside at 235,000 jobs added versus survey expectations for a gain of 200,000) and other key economic data released last week (including the unemployment rate and average hourly wages) already pretty much digested and in the markets’ rear-view mirror, investors are likely to stay focused with no small degree of concentration on this Wednesday afternoon at 2:00pm, when the Federal Reserve Board, having concluded its FOMC meeting, announces its much anticipated Fed Funds rate decision.
Based on futures expectations, widely publicized surveys of economists, investors’ and pundits’ commentaries, the announcement on Wednesday is likely to be near anti-climactic with an increase likely of 0.25% in the benchmark rate─unless the Fed should refrain from raising its benchmark rate at all or shocks the market with a larger than expected rate increase.
From our perch on the radar screen we’d anticipate no disappointment or shock by the market when the Fed announces its interest rate decision this week.
Last week’s action in the bond market, which saw the 10-year Treasury note’s yield move up to 2.6% (see figure below) along with a drop of just over 9% drop in the price of oil (WTI), sent conflicting signals that were interpreted as worrisome by some observers of last week’s action. “Was the 10-year Treasury’s move signaling that the Fed had fallen behind the curve in judging what might lie ahead in terms of higher inflation for the economy? Or was the drop in the price of oil signaling expectations for a drop in economic growth and hence demand for black gold?”
In our view, taken in context of transitions taking place stateside and around the world, the increase last week in the yield of the 10-year Treasury back to around 2.6% (near its peak of last year) was likely just a typical move ahead of a Fed decision during a rate hike/normalization cycle. We’d say it was more than likely bond price discovery in anticipation of a Fed increase rather than a warning signal about the rate of inflation or the Federal Reserve’s stance on it.
Last week’s drop in the price of oil, on the other hand, to us was not a signal that the markets sensed a whiff of economic weakness crossing the landscape but rather a sign that the oil market had come around to acknowledging the increase stateside in rig count (up over 17% year to date and up nearly 60% in the last 12 months), with stateside production beginning to edge higher, up over 3.6% year to date at the same time OPEC and its allies are limiting production and intent on keeping the price of oil stable to higher.
Weakness in the equity markets last week was not pronounced, in our opinion, but modest ahead of the Fed’s FOMC meeting and forthcoming statement. The S&P 500, the S&P 400 (mid-caps) and the Russell 2000 (small-caps) respectively declined 0.4%, 1.6% and 2.2% last week.
However, considering that those aforementioned indexes had respectively advanced some 19.3%, 23.5% and 27.3% in the last 12 months ended Friday, perhaps some profit taking, rotation and rebalancing were taking place as well as the market taking a breather to tip its hat to the Federal Reserve.
Not such a raging bull market. Taken in context of the S&P 500’s last cycle peak of 1565.15 on October 9, 2007, the S&P is up just under 52% since then, or around 4.5% annualized.
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