The Markets This Week

March 14th, 2017

The Standard & Poor’s 500 index ended a six-week winning streak as tumbling oil prices and a looming Federal Reserve rate hike caused stocks to stumble.

The S&P 500 fell to 2,372.60 last week, while the Dow Jones Industrial Average dropped 102.73 points, or 0.5%, to 20,902.98, their largest declines so far this year. The Nasdaq Composite dipped 0.2% to 5,861.73, its first weekly decline in seven weeks.

It’s a wonder the losses weren’t any bigger. The week started with the release of the widely criticized Republican plan to repeal and replace Obamacare, finished with a jobs report that virtually guarantees a rate hike at next week’s Federal Open Market Committee meeting, and saw oil drop below $50 a barrel. The downward pressure on the market, however, was limited.

That was, in part, because of the strength of the employment data, which was neither too hot nor too cold. The U.S. economy added 235,000 jobs in February, beating economist forecasts for 200,000, but not the blowout number that could have forced the Fed to raise rates by more than a quarter percentage point. If anything, the data just confirm what we’ve known for a while now: The economy is growing, and one rate hike is unlikely to do much damage, says MKM Partners strategist Michael Darda, who called the March Fed meeting “largely irrelevant.”

There’s still a strong likelihood of some sort of economic stimulus plan from the Trump administration sometime this year. Yes, it might be delayed by wrangling over the Republican proposal to repeal and replace the Affordable Care Act, which was met with derision from Democrats, moderate Republicans, and hardcore conservatives. But the fact that tax cuts and infrastructure projects are even being considered at a time when the U.S. economy is adding 200,000-plus jobs a month is “unprecedented,” says Richard Bernstein, chief investment officer at Richard Bernstein Advisors. “We’re going to add more stimulus on top of this.”

Still, a sense of unease hangs over the market, especially after the price of oil fell 9.1% last week, sinking to its lowest level since November. And the market is certainly overdue for a selloff. The S&P 500 generally drops 3% to 5% every two to three months, says Binky Chadha, chief global strategist at Deutsche Bank. The index has now gone more than four months without such a decline. Tumbles of 5% or more, meanwhile, have historically occurred every five to six months, Chadha says, something that hasn’t occurred since the Brexit vote eight months ago.

But just because the market is due for a correction doesn’t mean it will get one. While sentiment has played a big part in the rally, so has the fact that investors didn’t appreciate recent economic strength, says Chadha. As long as that continues, bouts of weakness should remain relatively muted. “Consensus forecasts have underestimated the recent rebound in growth and remain subdued, suggesting positive surprises are likely to continue in the very near term, so we don’t expect a pullback,” he says.

Never mind the unease.

(Source: Barrons Online)

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