Stocks rally after Bank of Japan cuts interest rates
- 2016-02-01
- By William Lynch
- Posted in Corporate Earnings, Economy, European Central Bank, Federal Reserve, Interest Rates, Oil Prices, The Market
While it might seem that anyone can be a value investor, the essential characteristics of this type of investor – patience, discipline and risk-aversion – may well be genetically determined. – Seth Klarman, American billionaire who founded one of the world’s largest hedge funds
After languishing in the red for most of the week, the stock market soared on Friday after the Bank of Japan surprised investors with an announcement that its benchmark interest rates would be pegged below zero. The price of oil also rebounded last week to close above $33 a barrel, easing concerns about the negative effects of low oil prices on the energy sector. The Japanese economy has been in the doldrums and the move by central bank officials to adopt negative interest rates may be a last ditch effort to reignite growth. Japan is not the only country whose economic growth is slowing. The European Central Bank (ECB) hinted just recently that additional stimulus measures were being considered to revive its moribund economy and boost inflation. In the U.S., even the Federal Reserve acknowledged in their statement last week that the economy had slowed and that inflation is likely to remain low in the near term. It also changed its view on consumer spending and business investment growth to “moderate” from “strong” in the December statement. The release of fourth quarter gross domestic product (GDP) on Friday confirmed this viewpoint as growth slowed to 0.7% and expanded at only a 2.5% rate for all of 2015. In fact, the last time that annual GDP growth exceeded 3% was way back in 2005. Weakness in consumer spending, manufacturing and energy as well as fewer exports and smaller increases in business inventory were primarily responsible for the anemic growth. Inflation as measured by the Fed’s preferred indicator, the personal consumption expenditure (PCE) index, also fell slightly and was well below the Fed’s target rate of 2%. Once again the rally in stocks on Friday was a case of bad news in the form of weak economic growth being perceived as good news by investors in the form of additional monetary easing by a global central bank; in this case, Japan. In light of the weak U.S. GDP data for the fourth quarter, it is also less likely that the Federal Reserve will continue with its initial plan to raise interest rates four times this year. Sooner or later, though, economic data will have to improve on a consistent basis for the stock market to move much higher.
Last Week
On the housing front, the S&P /Case-Shiller Home Price Index rose faster than expected in November, helped by low mortgage rates, lean inventories and an improving labor market. New home sales in December were also strong, rising nearly 11% in the month. Adding to the concern about weakening economic growth, U.S. durable goods orders fell 5.1% in December, much worse than expected. The biggest upside surprise was the Chicago purchasing managers index (PMI), which unexpectedly surged to nearly 56 in January, comfortably in expansion territory.
There were unsubstantiated reports last week that OPEC and non-OPEC countries might agree to a plan to reduce oil production by 5% for each country. These rumors helped contribute to the rise in crude oil prices for the second consecutive week.
For the week, the Dow Jones Industrial Average added 2.3% to close at 16,466 while the S&P 500 Index gained 1.8% to close at 1,940. The Nasdaq Composite Index rose 0.5% to close at 4,613.
This Week
The Institute for Supply Management (ISM) manufacturing index is expected to be at the break-even level for January, indicating neither expansion nor contraction. December factory orders are forecast to show a slight decline. The January employment report is due to be released on Friday and the expectation is for about 200,000 new jobs to be created with the unemployment rate remaining unchanged at 5%.
The 50th Super Bowl will be played on Sunday between the Carolina Panthers of the National Football Conference (NFC) and the Denver Broncos of the American Football Conference (AFC). Investors should be rooting for the Carolina Panthers if for no other reason that the Dow Jones Industrial Average has performed considerably better in years when an NFC team wins than if an AFC team wins.
It will be another busy week for fourth quarter earnings reports as Alphabet (formerly Google), Automatic Data Processing, Pfizer, Merck, Exxon Mobil, ConocoPhillips, Occidental Petroleum, Dow Chemical, General Motors, UPS, MetLife and Philip Morris International are just a few of the more prominent companies scheduled to report.
Portfolio Strategy
Despite the stock market rally on Friday of last week, the S&P 500 Index finished the month of January with a loss of 5.1%. Although the stock market has experienced one of the worst starts to a year since 1950, there are reasons to be optimistic about stocks in 2016. The U.S. labor market continues to be strong with a low unemployment rate of 5% and 292,000 new jobs created as recently as December. Another 200,000 new jobs should be added in January. The housing sector also remains strong as home prices continue to rise and recent data on housing starts and new home sales confirm a healthy real estate market. Ultimately, low oil prices should prove to be a boon to the U.S. economy as they act like a tax cut for consumers, putting more money in their pockets and giving them additional discretionary income. While China’s economy has slowed, the effect on the U.S. economy should be minimal as our exports to China account for about 1% of our total GDP. Many stocks have already suffered declines of 20% from their 52-week highs and the S&P 500 Index now trades at about 16 times estimated earnings for 2016, a reasonable multiple considering that the 10-year Treasury now yields only 1.93%. The headwinds of a strong dollar on profits of multi-national companies that export to foreign markets should begin to abate as the year progresses. For the most part, fourth quarter earnings reports have been better than expected, although revenue growth has admittedly been a struggle for companies and guidance going forward has been cautious. Recent consumer sentiment data also points to consumers being as confident as ever, despite the correction in stocks. This optimism should bode well for an economy where almost 70% of economic growth is based on consumer spending.
Recent Posts
Archives
- December 2024
- October 2024
- September 2024
- August 2024
- July 2024
- June 2024
- May 2024
- April 2024
- March 2024
- February 2024
- January 2024
- December 2023
- November 2023
- October 2023
- September 2023
- August 2023
- July 2023
- June 2023
- May 2023
- April 2023
- March 2023
- February 2023
- January 2023
- December 2022
- November 2022
- October 2022
- September 2022
- August 2022
- July 2022
- June 2022
- May 2022
- April 2022
- March 2022
- February 2022
- January 2022
- December 2021
- November 2021
- October 2021
- September 2021
- August 2021
- July 2021
- June 2021
- May 2021
- April 2021
- March 2021
- February 2021
- January 2021
- December 2020
- November 2020
- October 2020
- September 2020
- August 2020
- July 2020
- June 2020
- May 2020
- April 2020
- March 2020
- February 2020
- January 2020
- December 2019
- November 2019
- October 2019
- September 2019
- August 2019
- July 2019
- June 2019
- May 2019
- April 2019
- March 2019
- February 2019
- January 2019
- December 2018
- November 2018
- October 2018
- September 2018
- August 2018
- July 2018
- June 2018
- May 2018
- April 2018
- March 2018
- February 2018
- January 2018
- December 2017
- November 2017
- October 2017
- September 2017
- August 2017
- July 2017
- June 2017
- May 2017
- April 2017
- March 2017
- February 2017
- January 2017
- December 2016
- November 2016
- October 2016
- September 2016
- August 2016
- July 2016
- June 2016
- May 2016
- April 2016
- March 2016
- February 2016
- January 2016
- December 2015
- November 2015
- October 2015
- September 2015
- August 2015
- July 2015
- June 2015
- May 2015
- April 2015
- March 2015
- February 2015
- January 2015
- December 2014
- November 2014
- October 2014
- September 2014
- August 2014
- July 2014
- June 2014
- May 2014
- April 2014
- March 2014
- February 2014
- January 2014
- December 2013
- November 2013
- October 2013
- September 2013
- August 2013
- July 2013
- June 2013
Categories
- Commodities
- Corporate Earnings
- Covid-19
- Dow Jones Industrial Average
- Economy
- Elections
- Emerging Markets
- European Central Bank
- Federal Reserve
- Fixed Income
- Geopolitical Risks
- Global Central Banks
- Interest Rates
- Municipal Bonds
- Oil Prices
- REITs
- The Fed
- The Market
- Trade War
- Uncategorized