S&P 500 gains 1.1% on higher oil prices, ECB policy moves

We don’t have to be smarter than the rest. We have to be more disciplined than the rest. – Warren Buffett

After rather dull and directionless trading last week through Thursday, the stock market sprang to life on Friday with solid gains following the European Central Bank (ECB) meeting on monetary policy. ECB President Mario Draghi did not disappoint investors as the stimulus moves announced after the meeting surpassed expectations. Not only did the ECB cut the benchmark lending rate to 0% and the deposit rate to negative 0.4%, but it also expanded quantitative easing by increasing the monthly asset purchases from $66 billion to $87 million and added corporate bonds to the asset mix eligible to be purchased. The only negative in the package of stimulus measures, if you could call it that, was Draghi’s contention that additional interest rate reductions would probably not be implemented. Negative rates are harmful to the banking system and the fact that he doubted any further cuts would be made could actually be considered a positive for the banks. Draghi also acknowledged that monetary policy has its limits and called for a more aggressive fiscal response to combat low inflation and weak economic growth in the euro zone. It wasn’t only the ECB stimulus measures that caused stocks to surge on Friday. As has been the case over the last month, stocks have been highly correlated with oil prices and oil climbed to $38.50 a barrel, an encouraging sign that oil is in the process of stabilizing. Speculation that oil producers plan to meet later this month to discuss an oil freeze certainly helped boost the price. The International Energy Agency (IEA) also issued a report that suggested that the price of oil might have bottomed. While the additional ECB stimulus measures are welcome news, investors should also realize that past efforts have done little to revive their sluggish economy and that the ECB is gradually running out of ammunition.

Last Week

There was a news vacuum last week for quarterly corporate earnings reports and economic data which is why the focus was on the European Central Bank policy meeting. In other overseas news, China’s exports fell 25% in February, more than had been expected and the largest decline since May 2009. Imports also fell 14% but the weakness in the trade figures could have been attributed to the Lunar New Year holidays in early February.

The S&P 500 Index and the Dow Jones Industrial Average rose for the fourth consecutive week and the current bull market celebrated its seventh anniversary with the Dow returning 159% during that time.

For the week, the Dow Jones Industrial Average rose 1.2% to close at 17,213 while the S&P 500 Index added 1.1% to close at 2,022. The Nasdaq Composite Index gained 0.7% to close at 4,748.

This Week

There is a plethora of economic data this week, including the February producer price index (PPI) and the consumer price index (CPI), both of which are expected to decline slightly indicating an absence of any inflation pressures. Retail sales for February are also forecast to edge lower after posting a slight increase in January. Data on February housing starts and industrial production will be released along with leading economic indicators, which are expected to show a small increase. The March Michigan consumer sentiment index should reflect increased confidence among consumers in light of recent jobs data and a rebound in stock prices.

The Federal Open Market Committee (FOMC) meets to review monetary policy and interest rates and Fed Chair Janet Yellen will conduct a news conference afterwards. The Fed is not expected to raise interest rates but investors will be looking for clues on the timing of any future hikes. The Bank of Japan and the Bank of England also will meet to make a decision on interest rates.

In a quiet week for quarterly earnings reports, Cintas, Williams-Sonoma, Tiffany & Co., Adobe Systems, Oracle and FedEx are the most notable companies on the agenda.

Portfolio Strategy

European Central Bank President Mario Draghi lived up to his long-standing promise to do whatever it takes to lift the European economy out of the doldrums. With markets nervous that additional stimulus measures would fall short of expectations and send stocks into a nosedive, the ECB pulled out all of the stops and, for the most part, satisfied investors. While the European stock market has recovered from its worst levels this year, it still is down almost 4% and has underperformed the S&P 500 Index. Back in December, the ECB implemented modest stimulus measures that had virtually no effect on either Europe’s slowing economic growth or weakening inflation outlook. With the clock ticking and the need for Mario Draghi and the ECB to get ahead of the curve, the policy changes that were made last week should begin to have a positive effect on Europe’s economy. The apparent losers in the central bank’s new stimulus plan are the banks, which are having difficulty making money in a low interest-rate environment and are also struggling with the prospect of non-performing energy loans on their books. Banks will now have to pay the central bank 0.4% for the privilege of parking money there on an overnight basis. It appears that the ECB delivered in its promise to stimulate growth in the euro zone and now all eyes will be on the Federal Reserve this week to see what it has up its sleeve.