State of the Stock Market Analysis for the Week Ending February 21st, 2016 (Broader Market Sees Big Gains 2-21-16) All You Need Is Jobs

Bulls had been hoping for a Friday lift to close out a strong week for the stock market, but we ended the session flat and mixed. It was still a very strong week for the stock market overall, though, as the Dow rose 2.6%, the Nasdaq gained 3.9% and the S&P 500 lifted by 2.8%. Oil is still on the radar, and Friday’s 3.5% decline put crude back below the $30 per barrel level. The three-day rally that began last Friday was impressive, but it stalled out on Thursday and Friday of this past week. The positive part of the action we saw on Thursday and Friday was that the broader market held on to the big gains, and it appears to be in consolidation mode and not ready to head lower.

The price of oil remains on investors’ minds, though, and even with various OPEC and non-OPEC nations agreeing on production freezes this past week, oil still headed lower. News that U.S. oil reserves are rising, and that more and more domestic U.S. oil rigs are shutting down played into this equation. There is just a lot of surplus oil in the U.S. and the world, and it suggests that global GDP might be slowing. The decline in the price of oil has had a devastating effect on the U.S. shale oil industry, and the longer prices remain in the sub-thirty-dollar range, the harder it gets for domestic U.S. producers and their workforce that continues to see significant layoffs.

The correction we saw in stocks in January and early February still has strategists and investors scratching their heads. Was it a sign of a global slowdown or was it in response to that single 25-basis-point rate hike that the Fed began in December? Perhaps it was a combination of the two. The Fed’s recent dovish comments from its January minutes seemed to help boost investor confidence and the stock market, and the general feeling is that the Fed is in no hurry to continue with its rate hike agenda until much later this year. The latest buzz is that a September might be the earliest possibility of another rate hike.

Janet Yellen has said that the Fed’s “inflation target” is about 2%, but what we saw Friday in terms of the Consumer Price Index (CPI) shows that inflation is still tame. January’s CPI was a flat 0.0%, and while that was above the expected 0.1% decline, it still looks as though deflation is a bigger concern. The “core” rate for January rose 0.3%, and that topped estimates of a 0.1% increase, so in some ways, it does show that inflation is not completely dead in the water. The core rate excludes energy and food prices, and it is supposed to give a clearer picture of inflation, but is still a very low rate just the same. With global markets looking shaky even with this past week’s rebound, a Fed hike anytime soon seems unlikely.

Mario Draghi and the ECB did their best this past week to calm a Europe that had seen a big banking meltdown that, like the U.S., reversed last week. While Janet Yellen and the Fed might have been leaning hawkish on rates since December, Mario Draghi and the ECB seem ready, willing and able to turn the QE spigots back on at any time. We all know that the ECB has become masterful at bailing out the likes of Greece, Italy and Spain at a moment’s notice, and Draghi implied that more help would be on the way if needed. It is amazing how an ECB press release can rally European markets when the going gets tough.

The interesting development that has come out of Europe and even the U.S. is the notion of a “negative interest rate policy,” or NIRP, where savers are essentially charged a fee (via negative rates) just to keep their money safe. It seems to be an odd way to run a banking system, but this is what we are seeing. Throw in the various “cash controls” of not allowing large cash withdrawals, and it is puzzling. Earning more by having your cash in your mattress instead of in the bank also seems strange. Even the venerable Larry Summers this week said that the U.S. should get rid of the $100 bill. So again, it might fight crime, but why are all of these banking types moving in that direction?

On a different note, we all know that financial markets tend to like certainty, and what we are seeing in the political landscape in the U.S. is anything but certainty. The South Carolina primary should answer some questions regarding the Presidential election, but it is too close to call. Both parties seem divided among themselves, and while Trump and Hillary have marginal leads, there is no clear “lead dog” in either party. This could have an effect on the stock market in that when an election is “up for grabs,” it creates uncertainty. Both parties seem angry at the “big banks,” and that could be a variable that keeps investors and the stock market on edge until November.

It will be an interesting year to say the least, but at least we saw the major indices bounce back heartily from the lows we saw last Thursday. Some of the technical damage was reversed, and as long as we can start to build a base, then maybe the tough correction of 2016 will have run its course. That said, the Gorilla wishes each and all a wonderful and restful weekend. We have March Madness right around the corner and Spring on the way. It is never fun to have a January and a February feel like an October, but that was what we had. We will keep a close watch on the price of oil, so stay tuned, and again, have a great weekend. We will be back in action on Monday!

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