Stocks close lower on falling oil prices, stronger dollar

The average person is 95 percent eyes and only 5 percent mind when they invest. If you want to become a professional you need to train your eyes to be only 5 percent and train your mind to see the other 95 percent. – Robert Kiyosaki, American businessman, author and educator

The stock market’s winning streak of five consecutive weeks came to a halt as weak economic data, falling oil prices and a stronger dollar all contributed to modest losses in a holiday-shortened week of quiet trading. Terrorist attacks in Belgium on Tuesday initially jolted markets but stocks recovered to end the day only slightly lower. Treasury yields also declined and the dollar and gold closed higher as investors exhibited a flight to safety. While the data on February new and existing home sales were mixed, durable goods orders for February fell almost 3% as lower oil prices and a strong dollar hurt the sale of long-lasting U.S. manufactured goods. Manufacturing only comprises about 12% of the U.S. economy, but weak global demand, a strong dollar and capital spending cuts by energy companies have taken their toll on the sector. After climbing to over $41 a barrel, the price of oil skidded 4% last week as the Energy Information Administration (EIA) said that oil stockpiles had tripled over forecasted amounts. There is still hope that OPEC and non-OPEC members will agree on an oil output freeze but unless there is an actual decline in production, a global glut is likely to persist. Weakness in oil prices last week was also caused by strength in the dollar, which led to weakness in stocks as profits of U.S. multi-national companies are adversely affected. The Federal Reserve forecast of only two interest rate hikes this year was well-received by the market after the Federal Open Market Committee (FOMC) meeting but investors should be careful what they wish for. These dovish comments imply that U.S. economic growth remains weak, so much so that additional rate hikes could jeopardize modest growth projections. A strong labor market and lower gasoline costs should translate into increased consumer spending and stronger economic growth, but whether or not this actually occurs remains to be seen.

Last Week

Existing home sales declined 7.1% in February, the lowest level since November, but new home sales rose 2%, with sales surging in the West but falling in the Northeast, Midwest and South. Although durable goods orders fell in February, they were slightly better than expected and January’s decline was revised upward. Jobless claims were 265,000 last week, slightly better than expected, and have now been under 300,000 for 55 straight weeks, the longest stretch since 1973. The strong labor market has been the one constant in the economy and indicative of its overall strength to withstand weakness in energy and mining employment.

Despite economic growth that remains challenging, three Federal Reserve officials suggested last week that the Fed could raise interest rates again as early as its next meeting in April.

For the week, the Dow Jones Industrial Average lost 0.5% to close at 17,515 while the S&P 500 Index fell 0.7% to close at 2,035. The Nasdaq Composite Index dropped 0.5% close at 4,773.

This Week

There will be a slew of economic data this week, with the most anticipated piece of data being the March employment report due to be released on Friday. The consensus among economists is that about 200,000 new jobs will be created and that the unemployment rate will remain at 4.9%. The Institute for Supply Management (ISM) manufacturing index for March is expected to post its best reading in nine months and show a sector that is expanding. February construction spending is forecast to decline slightly but both the March consumer confidence and Michigan consumer sentiment indices should register above 90 and exceed last month’s numbers.

Only thirteen companies are on tap to report their quarterly earnings this week and the most prominent of these include McCormick & Co., Paychex, Lennar and Micron Technology.

Portfolio Strategy

As value stocks continue to outperform growth stocks so far this year and investors look for risk-averse, low-volatility ways to invest in equities, the American Century Equity Income Fund (TWEIX) is one such fund that has stood out among its peers. This fund invests almost exclusively in high-quality companies that have value characteristics, such as below-average price/earnings and price/book value ratios and above-average dividend yield and dividend growth prospects. By focusing on both income-producing securities with attractive yields and stocks with the potential for capital appreciation, this fund has been able to generate above-average performance with below-average risk over the long-term. Over the past 15 years, it has produced an average annual return of 7.5%, better than 98% of the value funds tracked by Morningstar. This exceptional performance has enabled the fund to receive a 5-star rating by Morningstar for its performance over the past ten years. This year, the American Century Equity Income Fund has a total return of 5%, compared to only a 0.1% total return for the S&P 500 Index through the close of business last Thursday. The fund is also very well-diversified with no position comprising more than 5% of the fund and no sector weighting deviating more than 10% from the weightings in the Russell 3000 Index. There are also exchange-traded funds or ETFs with similar objectives and characteristics that have posted positive returns this year as the S&P 500 Index has remained flat. Among these are the iShares Core High Dividend ETF (HDV), the SPDR S&P Dividend ETF (SDY) and the ProShares S&P 500 Dividend Aristocrats ETF (NOBL). All of these funds focus on stocks with either above-average dividend yields or above-average dividend growth prospects and they have rewarded investors this year with performance results that have beaten the market. In a year when returns could be difficult to come by and mid-single digit returns could be the norm, these funds should add value and improve the performance of any portfolio.