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Stocks mostly flat after Fed Chair Yellen’s testimony

People spend all this time trying to figure out “What time of the year should I make an investment? When should I invest?” And it’s such a waste of time. It’s so futile. – Peter Lynch

The major stock averages were basically flat last week as Fed Chair Janet Yellen struck mostly a dovish tone with her remarks about monetary policy and economic data was mixed. Yellen’s congressional testimony was definitely the highlight of the week as she reiterated that the Federal Reserve would be patient in normalizing interest rates. With the federal funds rate currently between 0% and .25%, she emphasized that it is unlikely that economic conditions will warrant an increase from this range for at least the next few Federal Open Market Committee (FOMC) meetings. She added that markets will have plenty of notice in the event that there is an interest rate hike. The only obstacle that stands in the way seems to be the low inflation rate, which remains below the Fed’s target rate of 2%. Other conditions such as the low unemployment rate and sufficient economic growth have been met. With the Fed Chair’s latest remarks, it appears that the new consensus for an interest rate hike has been pushed back to September from June. In terms of economic news, the data released last week was both positive and negative. Probably the most closely watched piece of data was U.S. fourth quarter gross domestic product (GDP), which was revised lower to 2.2% as lower oil prices have yet to have a positive effect on the economy. Two months into the year, global economies remain weak, manufacturing growth has slowed, business investment and capital spending have been soft and retail sales have been lackluster. It was widely expected that cheaper oil and gas would provide a tailwind for the global economy but so far that has failed to materialize.

Last Week

Housing data last week was both good and bad. Existing home sales fell sharply in January to the lowest level in nine months due to a supply shortage of available homes and tight inventory levels. On the other hand, new home sales were better than expected and remain near multi-year highs as supply rose to the highest level since 2010. Durable goods orders rose a better-than-expected 2.8% in January while the consumer price index (CPI) fell 0.7% due to sharply lower oil prices. The core CPI, which excludes food and energy, increased 0.2%.

Euro-zone finance ministers approved a four-month extension of Greece’s new bailout plan, which includes reforming tax and pension policy, reducing public spending and combating tax evasion and corruption. Investors likely have not heard the last from Greece as the reform measures were vague and not specific.

For the week, the Dow Jones Industrial Average fell just seven points to close at 18,132 while the S&P 500 Index lost 0.3% to close at 2,104. The Nasdaq Composite Index rose only 0.2% to close at 4,963.

This Week

The government will save the best for last this week as the February employment report released on Friday promises to attract the most attention among investors. Estimates call for 240,000 new jobs to be created with the unemployment rate edging down to 5.6% from 5.7% in January. Automobile sales for February are expected to decline slightly due partly to unseasonably cold weather but should still register an adjusted annual rate of 16.7 million.

As far as other economic data are concerned, the February ISM Manufacturing Index should report the same number as last month and show that the manufacturing sector continues to expand at a moderate pace. January factory orders are expected to decline slightly while January construction spending is expected to increase slightly.

With the fourth quarter earnings season virtually over, retailers will again dominate the earnings reports this week. Among those due to report are Best Buy, Dicks Sporting Goods, Abercrombie & Fitch, Staples, PETsMART and Costco Wholesale.

Portfolio Strategy

After posting a negative total return in January, the S&P 500 Index rebounded in February to gain over 5% and is now up 2.6% for the year. Small and mid-cap stocks have performed even better with returns generally in excess of 3.5%. Real estate investment trusts (REITs), which were up over 30% last year and up about 10% earlier this year, have since come back down to earth with a year-to-date return of about 3%.  Before the year began, most investment strategists had forecast that U.S. equities would again be the best performing asset class in 2015. While this could still be true, what is surprising is the strong performance of international stocks as measured by the MSCI World Index ex-U.S. The total return of this index has more than doubled that of the S&P 500 Index, thanks mostly to the strong showing of Europe. Modestly improving European gross domestic product and leading economic indicators as well as the European Central Bank’s recent stimulus plan have been responsible for this recovery in stock prices. Europe’s bond-buying program will keep the euro weak and boost the profits of companies that are heavy exporters. Low interest rates should also lead to additional business investment while low oil prices should benefit both consumers and companies that use oil to manufacture their products. While the U.S. economy and stock market should continue to do well, this could be the year that international stocks, particularly European equities, perform even better.