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S&P 500 rebounds as oil prices rise

Politicians like to tell people what they want to hear – and what they want to hear is what won’t happen. – Paul Samuelson

All of the major stock averages rebounded last week to post healthy gains but whether or not this momentum will continue is questionable. Much of the strength in stock prices was confined to the most beaten down names that had become significantly oversold and due for a dead cat bounce. The fact that crude oil prices rose last week and stabilized around $30 a barrel was a positive sign for stocks, but this rally could also be short-lived. Reports that Russia and Saudi Arabia had agreed on an oil production freeze was welcome news but the deal was contingent on participation from other major oil-producing countries. Iran’s oil minister also announced that it supported a plan to freeze oil output at January levels. While the tentative agreement was not an actual cut in oil production, it was a step in the right direction and cheered by investors. Stocks have moved in lockstep with oil prices recently and for the stock market to perform better, oil needs to show some stabilization in the $30 to $40 price range. Minutes from the most recent Federal Reserve meeting struck mostly a dovish tone as Fed officials acknowledged increasing concern over financial market volatility, falling oil prices and slowing global growth. Most of the members stressed a need to see additional data regarding the economy’s strength and inflation prospects before continuing with more interest rate hikes. Some members even felt that investors took the Fed’s rate hike forecast of four increases in 2016 as being set-in-stone and not dependent on economic data. Whatever the case may be, the odds of another rate hike in March are almost zero. The fourth quarter earnings season is winding down and earnings reports last week took a back seat to the movement in the price of oil. Although U.S. economic data was generally mixed, the overall assessment of the results skewed positively and helped improve market sentiment, which had become increasingly negative over the prospects for both the economy and the stock market. The fundamentals of the economy do appear to be better than what the stock market has been portraying since the start of the year.

Last Week

Inflation continued to be benign as the January producer price index (PPI) rose only 0.1% and the consumer price index (CPI) was flat and has risen only 1.4% over the past 12 months. Excluding food and energy, though, the core CPI jumped 0.3% on higher medical care costs and housing expenses. U.S. housing starts dropped almost 4% in January but the decline was mostly attributed to harsh weather that affected building projects in parts of the country. Industrial output in January was better than expected and jobless claims fell to 262,000, a three-month low, as the labor market does not show any signs of weakening.

The Atlanta Federal Reserve recently raised its estimate for first quarter gross domestic product (GDP) to 2.7% from 2.5%, encouraging news after only 0.7% growth in the fourth quarter.

For the week, the Dow Jones Industrial Average rose 2.6% to close at 16,391 while the S&P 500 Index gained 2.8% to close at 1,917. The Nasdaq Composite Index jumped 4% to close at 4,504.

This Week

Both existing home sales and new home sales for January should be at levels consistent with a housing market that continues to improve. January durable goods orders are expected to rebound after posting a decline in December. The second reading on fourth quarter GDP is expected to be released on Friday and show slightly lower growth.

A number of Federal Reserve bank presidents are scheduled to speak this week and offer their views on monetary policy and the outlook for the economy.

Retailers will dominate this week’s earnings calendar as Home Depot, Lowe’s Co., Target, Macy’s, and Kohl’s are due to report. Other blue chip companies on the agenda include Allergan, Berkshire Hathaway, HP and Motorola Solutions.

Portfolio Strategy

While it’s difficult to know whether or not the stock market has put in a bottom and is poised to move higher, insider bullishness and stock buybacks may be just the cure for this ailing market. Insider sentiment measures the ratio of insider selling to buying and this ratio has been declining, or turning more bullish, since the last week of December. The CEO of JP Morgan Chase, Jamie Dimon, recently bought 500,000 shares of his company stock for more than $26 million, a vote of confidence in the stock that had been pummeled in the stock market sell-off. Not only did JP Morgan stock soar on the news but other depressed bank stocks also gained. Many of these stocks are pricing in a recession when the odds of a recession are still remote. For the most part, insider sentiment remains very bullish, a positive indicator for stocks as insiders are in a better position to know about their company prospects. Investors also have benefited in the past from companies that buy back their own stock as this reduces the number of shares outstanding, thereby boosting the earnings per share figures. With stock valuations considerably lower now than just two months ago, it makes sense for companies to repurchase their own shares. There are many profitable companies that are sitting on a lot of cash and have low levels of debt, two conditions that make them good candidates to buy back their stock. Stock buybacks were weak in January but that could change in the months ahead as companies look for ways to deploy excess cash and increase their stock price.