Download March 18, 2016

In the markets:
Large-caps moved back into positive territory for 2016 as stocks scored a fifth consecutive week of gains.
The major indexes all remain substantially below their record highs set last summer, but only the smallcap Russell 2000 index ended the week still in correction territory—commonly defined as a decline of 10% or more from a recent high. For the week, the Dow Jones Industrial Average tacked on an
additional +389 points to close at 17,602, up +2.26%. The LargeCap S&P 500 gained +1.35%, the MidCap
S&P 400 added +1.61%, and the SmallCap Russell 2000 rose +1.3%. Both the Dow Transports and
Utilities were positive for the week as well, up +4.97% and +1.76%, respectively.
In international markets, Canada’s TSX declined slightly down -0.18%. In Asia, the big winner was
China’s Shanghai Stock Exchange which rallied +5.15%. Hong Kong’s Hang Seng was also a good gainer
at +2.34%, but Japan’s Nikkei declined -1.26%. Europe experienced a mixed week; the United Kingdom’s
FTSE was up +0.81%, Germany’s DAX gained +1.22%, and the Netherlands Amsterdam Exchange rose
+0.69%, but France’s CAC 40 declined -0.67% and Italy’s Milan FTSE was off -1.98%.
In commodities, the industrial metal copper continued its recent rebound, closing the week up +2.24%.
Precious metals were also positive as Gold added $4.90 (+0.39%) to close at $1,256 an ounce. Silver,
often the more volatile of the two, rose 2.03% to $15.82 an ounce. Oil continued its impressive rally,
adding an additional +$2.64 to close the week at $41.13 a barrel for West Texas Intermediate crude oil—
a gain of +6.86%.
In U.S. economic news, initial claims for jobless benefits rose 7000 to 265,000 last week, a smaller than
expected rise from the prior week’s five month low. The smoothed four week average of claims rose
750 to 268,000 as claims remained below the 300,000 level for 54 weeks, the longest stretch since 1973.
It may be too early to call it a correlation quite yet, but among states where the minimum wage rose at
least $.50 per hour, seven out of eight lost jobs in January according to the Labor Department. Arkansas
stood out in its region of the country by hiking its wage $.50 to $8.25 an hour. It suffered the biggest job
losses among those states imposing wage hikes-- it reported a loss of 5,100 jobs, and the average
workweek there declined to 33.7 hours, down -1.1 hours from a year earlier.
U.S. housing starts rose +5.2% to an annual rate of 1.178 million units, according to the Commerce
Department. The gain was after two consecutive months of declines. Single-family home starts jumped
+7.2% to their best levels since before the recession.
Consumer prices fell in February, but underlying inflation trends remain intact, the Labor Department
reported. The consumer price index declined -0.2% in February as energy costs plunged the most in
seven years. But core prices, which exclude food and energy, rose +0.3% for a second straight month.
Year-over-year, core CPI climbed to 2.3%, the highest in nearly 4 years and slightly above the 2% Fed
target inflation rate. Service costs are behind the increase in inflation, with the services ex-energy
inflation rate coming in at over 3% - the most in more than seven years. Services prices, by their nature,
are less exposed to commodities swings and international competition.
U.S. retail sales declined -0.1% in February, matching expectations, but concerns were raised by the
January sales number which was revised sharply lower. Instead of the +0.2% gain initially reported for
January, the Commerce Department now states that sales sank -0.4%. Two major sub readings also got
sharp downward revisions for January. Retail sales excluding autos were revised down by a half point to
a -0.4% decline. Sales ex-autos and gasoline were also revised down a half point to a -0.1% decline. For
February, retail sales ex-autos improved to a -0.1%. After the release of the disappointing January
numbers, economists at Barclays downgraded their outlook for US GDP in the first quarter to 1.9%
growth from 2.4%. On a more positive note, core retail sales (ex-autos, gas, food services, and building
materials) grew +0.3% in February, the 3rd increase in 4 months and up 4.3% from a year earlier.
Despite the bad news in the retail sector, the manufacturing sector got good news from the New York
Federal Reserve’s Empire State manufacturing index, which rose +17 points to 0.62 - the first positive
reading since last July. New orders and shipments both increased while employment held steady. In
Philadelphia, the Federal Reserve reported its index of mid-Atlantic manufacturing rose to 12.4 from 2.8 in February, the first positive reading in seven months. In that report, the new orders index jumped
21 points to 15.7. The employment gauge for the Mid-Atlantic area rose 4 points, but still remained
negative at -1.1.
Consumer sentiment unexpectedly declined for a third straight month in March according to the latest
University of Michigan consumer survey. The index’s flash reading was 90, down -1.7 points from
February’s final reading. It’s the lowest reading since last October and analysts had expected a reading
of 92.2. The survey measures consumers’ attitudes toward current economic conditions and their
future expectations.
This past week, the Federal Reserve held its key interest rate steady and signaled that it’s willing to meet
markets halfway. Instead of the four rate hikes this year that Fed policymakers had signaled in
December, they now see two quarter-point hikes. Relief that the pause in rate hikes may extend for
another six months helped boost major stock indexes. In contrast, the January Fed meeting minutes
released this week (now almost 2 months out of date), showed that one Fed member anticipated a
single rate hike this year, nine predicted two hikes and seven predicted three or more hikes.
In Europe, Eurostats, the EU’s statistical arm reported industrial production in the Eurozone in January
was up a solid +2.1% over December, the best reading in six years. Construction spending rose +3.6%.
Inflation in the euro area came in at -0.2% annualized vs. a 0.3% rate in January as Germany, France,
Italy, and Spain were all negative.
In Asia, Chinese property prices in the top cities soared as much as +57% in the trailing year thru
February, according to the National Bureau of Statistics. Nationally, all prices rose at an average annual
rate of +2.8%, the biggest one-month rise since June 2014 according to a review of government data by
the Financial Times. Separately, Central Bank governor Zhou Xiaochuan stated that China would not rely
as heavily on exports for economic growth this year since their contribution to the economy has been
dwindling.
In Japan, the Bank of Japan left monetary policies unchanged after cutting interest rates into negative
territory in January. Japanese department store sales improved in February from year-ago levels. Sales
rose 0.2% year-over-year in February, up from -1.9% in January.
Finally, analysts looking at the US stock market gyrations this year – a big downdraft followed by an
offsetting rip higher – have begun to point to a factor that seems to neatly explain it all: the dollar.
Binky Chadha, Chief Global Strategist at Deutsche Bank, told marketwatch.com: “A lot of the market
convulsions looked like they were coming from independent things. But they all had a common
denominator and that’s the dollar.” Furthering this dollar-centric view, rumors are now circulating that
finance ministers and central bankers at the late-February G-20 meeting in Shanghai settled on a socalled “Shanghai Accord” to weaken the dollar and thereby calm the financial markets. Although there
is nothing official to back up this suspicion, what is undisputed is that the dollar has declined more than 3% since the G-20 gathering and that has coincided with a near-vertical rally in stocks, emerging market
assets, and commodities (including oil). A weaker dollar has also been noted as a key reason in the 54%
rally in U.S. crude and a 40% rally in Brent crude. The chart below shows the drop in the Dollar Index
from almost 100 to less than 95, which is also below the dollar’s important 200-day moving average,
with the biggest part of that drop coming after the Shanghai G-20 meeting.
(sources: all index return data from Yahoo Finance; Reuters, Barron’s, Wall St Journal, Bloomberg.com,
ft.com, guggenheimpartners.com, ritholtz.com, markit.com, financialpost.com, Eurostat, Statistics
Canada, Yahoo! Finance, stocksandnews.com, marketwatch.com, wantchinatimes.com, BBC,
361capital.com, pensionpartners.com, cnbc.com, FactSet; Figs 1-5 source W E Sherman & Co, LLC)