The stock market is in a very tough spot right now. We saw a weak January, a strong February, and while March is down, the month is still up for grabs in terms of performance. It looked as though the stock market would be off to the races after last week’s great-looking jobs number, but oddly enough, this week turned into a bit of a downer for the bulls. We continue to see mixed economic numbers, and Friday’s economic reports were exactly the type of news the bulls did not want to see. We were looking for increased consumer confidence and maybe even a little inflationary pressure, but the numbers showed the exact opposite.
The University of Michigan consumer sentiment report fell to 91.2, which was below last month’s 95.4, as well as below the 94.8 that economists had expected. This threw water in the face of the “consumer-driven recovery” that so many strategists had hoped for, and the recent slip in retail sales only reinforced the buzz about a weak consumer sector. In other news, the Producer Price Index (PPI) fell 0.5% versus the 0.4% increase that economists had expected, and that added to Friday’s negative vibe that drove stocks lower to close out the week.
Stocks were sharply lower for most of the day on Friday, but a late-day lift at least cut some of the day’s losses, making the down day seem not all that bad. It was still a downer for weekly returns, though, as the Dow fell 0.6%, the Nasdaq slipped 1.1% and the S&P 500 lost 0.9%. Investors now await the Federal Reserve and its comments next Wednesday, and the bulls are hoping for a potential “back peddle” on the Fed’s hints about rate hikes as early as June.
It seems as though this week’s slide in stocks is transmitting a huge message to the Fed to keep it calm on any chance of rate hikes sooner rather than later. Yes, we did get an impressive jobs number last week, but we continue to get weak economic news that contradicts the non-farm payroll number. Investor are clearly nervous about the Fed and its bias toward raising interest rates, so bulls are hoping that calm heads prevail, and that the Fed does nothing extreme with its statement next Wednesday.
The Fed is in an impossible position, however, and it knows that it needs to raise interest rates in order to combat any potential problems that might be coming our way. The push-and-pull between inflation and deflation is still playing out, but the momentum seems to have shifted toward deflation. The Federal Reserve can always raise rates to combat inflation, but what does it do if we face deflation? Maybe that is why the Fed wants to have higher rates sooner rather than later, and maybe that is why investors are suddenly acting a little nervous.
Adding to this week’s unsettled stock market, we saw oil prices resume their downward trend. The price of oil was down about 4% on Friday, which pushed it back down to around $45 per barrel. Oil is another global “wild card,” and seeing oil prices fall this week by nearly 10% had economists and strategists scrambling and scratching their heads. Is oil falling because of a global GDP slowdown, or is the decline the result of excess supply? It is a tough topic to understand, so we will continue to monitor the volatile and ever-changing oil market.
January’s rough start told us that this might be a challenging year, and that is exactly how it is unfolding. Thoughts of a weakening economy are occurring along with the potential for interest rate hikes, which has investors confused. We also have a Fed that seems ready to raise interest rates, or a Fed may be ready to make it clear that it has no plans to raise rates anytime soon. This uncertainty hurt stocks this week, so hopefully we will see more clarity in the week ahead.
That said, the Gorilla wishes each and all a restful and relaxing weekend. It has been a volatile year thus far for the stock market, and a pre-Spring weekend is a great way to unwind and figure things out. March Madness and the big college tournament are on the way. Have a great weekend, and we will be back in action on Monday.
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