State of the Stock Market Analysis for the Week Ending March 20th, 2016 (Fed Calms and Market Rallies 3-20-16)
It was a solid week for the stock market, as the Dow and the S&P 500 gained enough this week to put themselves in positive territory for the year. That was quite an impressive feat. The Nasdaq is still lagging a bit, but it could join the Dow and the S&P soon. From the nerve-wracking February lows, the stock market has rallied in a big way, and instead of us flirting with bear market territory, we are suddenly positive for the year. We can probably thank the Federal Reserve for its “dovishness” this week, when it made clear that any rate hikes for later this year would remain calm, cool and measured.
The hawkishness of the past few months seemed to take a backseat, and the Fed is clearly backing off from interest rate hikes anytime soon. The Fed’s comments this past week followed Mario Draghi’s rate cuts and more QE promises last week, so it looks as though it is “game on” in terms of central banks doing whatever it takes to keep financial markets afloat. The interest rate cuts and QE have worked well for nearly eight years following the economic crisis of 2008, so why would central banks want to change course at this juncture?
In economic news, it was disappointing to see consumer sentiment fall to 90.0 for March, which was below the 92.1 reading that economists had expected. The 90.0 reading was also down from February’s 91.7, and that raises concerns about the broader U.S. economy. Consumers drive 70% of the economy, and if consumers are in the doghouse, then the economy is too. We are multiple years into a “recovery,” but when we see consumer confidence trailing off, it suggests that we could be heading toward a recession. The Fed can lower rates to zero, but that does not guarantee that a recession will not occur.
The numbers we are seeing on the economy continue to be mixed at best. For every positive report, we seem to get a negative one, as was evident with the unfavorable consumer sentiment number we saw this week. Investors are taking these mixed numbers in stride, though, and the stock market’s rebound from the late-February lows is very impressive. Having the S&P 500 back above 2,000 has increased investor optimism greatly, and the bullish crowd is looking for more gains in the days and weeks ahead. We are in a strong position from a technical standpoint, and the trend is toward higher highs.
The Presidential political landscape is confusing, but it does not seem to be having much of an effect on the stock market. It seems that the more complicated and confusing the political realm gets, the better the stock market does. The conventional wisdom is that a divided government in Washington is good for stocks, and sadly enough, we are seeing an extremely divided electorate right now. November promises to be an interesting battleground, so stay tuned. Maybe the stock market will continue to rally in the midst of all of this political division. Who knows?
The Federal Reserve and the ECB are clearly on record to not raise rates or rock the apple cart. The 10% correction we saw in the U.S. stock market through February has spooked the Fed, and its dovish posturing this past week signals that rate hikes are clearly on the back burner. This could explain why the stock market has rallied so strongly during these past few weeks. With rate hikes on hold, this could help stocks continue their upward trajectory in the weeks ahead. That would have few bulls complaining, especially since the Dow and the S&P 500 are finally positive for the year.
The Gorilla wishes each and all a relaxing weekend. College Basketball’s “March Madness” is underway, and there have already been quite a few surprising upsets. Word has it that Warren Buffett offered $1 million per year for life to any of his Berkshire employee “office pool” winners who have a perfect NCAA basketball bet. Apparently, Berkshire has 330,000 employees, and you had to be an employee of Warren to participate. It is a great weekend to watch basketball, though, and get ready for Spring. We will be back in action on Monday. Again, have a great weekend!
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