Stocks gain on economic data, stable oil prices

With enough insider information and a million dollars, you can go broke in a year. – Warren Buffett

Stronger than expected economic data and oil prices that stabilized above $30 a barrel helped propel all of the major stock averages higher for the second consecutive week. Early in the week, the International Energy Agency said that it expected shale production to fall this year. This forecast came on the heels of a report that the U.S. oil rig count had fallen to the lowest level since December 2009. Even though Saudi Arabia proclaimed that there would be no cut in their oil production, officials plan to meet with other oil producers in mid-March to discuss ways to stabilize the market. All of these developments were bullish for the price of oil and for the stock market, which has been in lock step with oil price movements lately. For the most part, economic data released last week was also positive and contributed to the gains in stocks. Fourth quarter gross domestic product (GDP) was revised higher to 1%, better than the initial reading of 0.7% and the expected reading of just 0.5%. Consumer spending was also robust in January and the personal consumption expenditures (PCE) index, the Federal Reserve’s preferred measure of inflation, increased by the largest amount in over two years. All of this better than expected economic data alleviated any near-term recession fears but raised concern that the Fed might be inclined to raise interest rates faster than expected. These reports were all released on Friday, a day that saw the S&P 500 Index relinquish some of its gains for the week as it traded back below 1,950, a level that has provided strong resistance lately from a technical standpoint. While no interest rate hike is expected at the next Federal Open Market Committee (FOMC) meeting in March, investors will once again have to ponder the Fed’s next move and look for clues about the pace of future rate hikes.

Last Week

Data on the housing sector was favorable last week and helped contribute to the positive market sentiment. According to the S&P/Case-Shiller Home Price Index, U.S. home prices rose 5.7% in December. Existing home sales in January also rose to a 6-month high and new home sales were slightly lower than expected but still relatively strong. Durables goods orders for January rebounded to post a gain of 4.9%, much better than the December report and the biggest gain in ten months. On the negative side, U.S. consumer confidence in February fell to the lowest level in seven months.

The International Monetary Fund (IMF) said that it expects to lower its forecast for global growth, citing increased financial market volatility, slumping oil prices and geopolitical tensions as the major impediments to growth.

For the week, the Dow Jones Industrial Average jumped 1.5% to close at 16,639 while the S&P 500 Index rose 1.6% to close at 1,948. The Nasdaq Composite Index gained 2% to close at 4,590.

This Week

The most anticipated economic report will be released on Friday when the government reports the employment data for February. The expectation is for about 190,000 new jobs to be created and for the unemployment rate to remain at 4.9%. The February Chicago Purchasing Managers Index (PMI) is expected to decline slightly but still be comfortably above 50, indicating continued expansion. The ISM manufacturing index is also expected to drop slightly due to the strong dollar and weak overseas economies.

The Federal Reserve releases its beige book on regional economic conditions throughout the country and ADP releases its private payroll data ahead of the February employment report by the government.

Retailers will again dominate this week’s earnings calendar as Costco Wholesale, Kroger, Staples, Dollar Tree and Dick’s Sporting Goods are all scheduled to report. Other companies that will report earnings include Autozone, Medtronic, H&R Block and Broadcom.

Portfolio Strategy

Although it may be too soon to signal the all-clear button for stocks after the pessimism and increased volatility experienced in January and February, there are a number of reasons to be positive about the market. The economy appears to be gaining strength as GDP has improved, inflation has picked up and oil and commodity prices have begun to stabilize, easing any immediate fears of a recession. Talk of an oil production freeze by major oil producing countries is a step in the right direction as these countries at least acknowledge that a problem exists. Central banks around the world continue to be accommodative and the likelihood of negative interest rates in the U.S., which would hurt the banking industry, appears very remote. Banks are also as well-capitalized as they have ever been and their exposure to energy loans is limited and manageable and should not present a problem like housing did during the financial crisis in 2008. Overseas, China has been implementing necessary economic reforms to combat slowing growth and has refrained from devaluing its currency any further. The U.S. housing market also continues to improve and this recovery will likely remain in place for the foreseeable future. Finally, most companies have strong balance sheets and are using their excess cash to implement stock buyback programs. Merger and acquisition activity also continues to occur with regularity as companies look for ways to generate growth in the future.