The individual investor should act consistently as an investor and not as a speculator. – Benjamin Graham
The S&P 500 Index closed higher for the fifth consecutive week and was in positive territory for the first time this year, making the correction back in January and February seem like a distant memory. More than anything else, the results of the Federal Open Market Committee (FOMC) meeting were the biggest single catalyst that enabled stocks to continue their winning ways. The Fed decided to leave interest rates unchanged and projected that there would be just two rate hikes this year instead of the four rate hikes that had been forecasted initially. This would amount to an increase of half of a percentage point rather than a full percentage point. The FOMC now sees a fed funds rate of 0.9% by year-end and 1.9% at the end of 2017. The reliability of the Fed’s crystal ball is open to debate but investors cheered the news that near-zero interest rates would be in place for the foreseeable future. The stock market was also bolstered by weakness in the dollar, which contributed to the rise in the price of oil to nearly $40 a barrel. No meeting between OPEC and non-OPEC members on a coordinated oil output freeze is likely until mid-April and demand for oil continues to be tepid. Oil has not been at these levels since early December and fears about a global recession have been postponed at least temporarily. Softness in the dollar also helped improve the outlook for U.S. multi-national companies that export their products overseas and benefit from a weaker dollar. Economic data last week was decidedly mixed and the stock market will likely mark time until the first quarter earnings season begins in several weeks. With earnings expected to decline in the first quarter and the S&P 500 now trading at 17 times analysts’ projected earnings estimates for 2016, the catalyst for the next leg up is unclear. Given the strong rebound in all of the major stock market averages, the best and most likely scenario for investors might be a period of time where stocks consolidate their recent gains.
Retail sales in February fell slightly and were less than forecast, suggesting consumer spending is likely to remain sluggish over the near-term. Both the producer price index (PPI) and the consumer price index (CPI) fell slightly in February but the core CPI, which excludes food and energy, has risen 2.3% over the past twelve months. U.S. housing starts were better than expected in February and reached the highest level in five months, helped in part by a firming labor market. U.S. industrial production dropped slightly and was hurt by low oil prices, a relatively strong dollar and weak global demand. Lastly, the Philly Fed manufacturing index turned positive for the first time in seven months, a welcome sign in that sector.
For the week, the Dow Jones Industrial Average jumped 2.3% to close at 17,602 while the S&P 500 Index rose 1.4% to close at 2,049. The Nasdaq Composite Index added 1% to close at 4,795.
Both February existing home sales and new home sales should be mostly unchanged and consistent with data from the previous month. February durable goods orders are expected to decline after a strong January as transportation orders, particularly aircraft orders, should be weak. The final reading on fourth quarter gross domestic product (GDP) should remain the same at only 1%.
A number of Fed presidents are scheduled to speak on a range of topics and are likely to give their views on the economy and monetary policy. The markets are closed in the U.S. on Friday in observance of Good Friday.
It promises to be another slow week for quarterly earnings reports as Carnival, Nike, General Mills, GameStop, Winnebago and Accenture headline those companies that are scheduled to report.
Although the current valuation of the S&P 500 Index appears full after the recent rebound in stock prices, so-called value stocks that are underpriced relative to fundamentals, earnings and book value could continue to shine. After underperforming growth stocks for the last nine years, value stocks have come to life this year and have outperformed their growth counterparts. As a matter of review, value stocks typically have below-average price/earnings and price/book value ratios and above-average dividend yields and dividend growth prospects. Growth stocks, on the other hand, are shares of companies whose earnings are expected to grow faster than the overall market but which trade at price earnings multiples that are much higher. Many momentum stocks with strong price performance also fit the definition of growth stocks. The so-called FANG (Facebook, Amazon.com, Netflix and Google, now Alphabet) stocks are all considered growth stocks and were highfliers last year but have disappointed investors this year as three of the four are in the red. Growth stocks are also characterized by their low dividend yields as these companies reinvest any excess cash back in the business to fuel future growth rather than pay it out to shareholders in the form of dividends. Companies that are classified in the financial, energy, industrial, retail, materials and telephone and electric utility sectors of the S&P 500 are typically considered value stocks while those in the health care, consumer non-durable, consumer cyclical and technology sectors are generally considered growth stocks. After being out of favor and unloved by investors for such a long time, it appears that value stocks could be on the verge of a comeback this year.