Stocks ended mixed during the shortened holiday week as investors digested the latest round of weaker-than-expected economic data. The self-described data-dependent Fed will likely err on the side of keeping rates low for the foreseeable future because the “data” remains very weak. The Fed has held rates near zero since the 2008 financial crisis and has engaged in three rounds of massive QE (printing money). Even after all this, the Fed finds itself between a rock and a hard place. The Fed has a dual mandate, steady economic growth and keep inflation around 2%. Right now, they are failing on both fronts. Deflation remains more of a threat than inflation and the “data” suggests the economy remains very weak (and possibly contracted in Q1). In addition, Q1 earnings are projected to be negative which is not ideal. All this tells us that the Fed will continue to err on the side of EASY MONEY for the foreseeable future.
Monday & Tuesday’s Action: Economic Data Remains Weak
The Dow Industrial average soared nearly 300 points on Monday after two important Fed officials came out and basically reiterated their case for “easy money.” After Friday’s (3/27’s) close, Janet Yellen gave a speech and basically said the Fed remains data dependent and will err on the side of keeping rates lower, until needed. Then Sunday night, futures barely budged so before Monday’s open (6am EST), Ben Bernanke turned into a blogger and of course his first blog post made the case for keeping rates near zero for the near future. The Yellen/Bernanke one-two punch was enough to send stocks nicely higher on Monday. Overseas, China’s Central Bank said they are ready to lower rates and bank reserve requirements to fight deflation, if needed. This is their way of saying that they will gladly join the international central bank easy money parade, if needed. Economic data was mixed on Monday. Personal income beat estimates but personal spending fell short. The closely watched PCE deflator, which is the Fed’s preferred inflation measure, rose +1.4% year-over-year, which barely topped the +1.3% forecast. Separately, the Dallas Fed manufacturing Activity Index plunged by -17.4, widely missing estimates.
The Dow fell 200 points on Tuesday, giving back most of Monday’s gains, on the last day of Q2. Economic data was mixed. Consumer Confidence rose to 101.3, which easily beat the Street’s estimate for 96.4. The ISM Milwaukee Index was 53.25, almost matching estimates for 52.5. Meanwhile, The S&P-Case Shiller home price index easily beat consensus. On the downside, the March Chicago Purchasing Managers Index fell to 46.3, missing by a mile. M&A news picked up on Tuesday. Charter Communications (CHTR) said it will acquire Bright House Networks for $10.4 billion, while Endurance Specialty Holdings (ENH) is acquiring Montpelier Re (MRH) for $1.8 billion. Also, CBRE Group (CBG) said it is purchasing a unit of Johnson Controls (JCI) for $1.5 billion. For the quarter, stocks were mostly flat, but the small-cap Russell 2000 and Nasdaq composite both ended the quarter with a small single digit gain. The S&P 500 was flat and the Dow lost a little ground.
Wednesday & Thursday’s Action: Jobs Report Disappoints
Stocks ended mixed on Wednesday and edged higher on Thursday as investors digested the latest round of economic data and waited for Friday’s jobs report. Stocks were closed on Friday in observance of the holiday but the jobs report was still released. Leading up to the jobs report, ADP, the country’s largest private payrolls company, said private companies added 189k new jobs in March which easily missed the Street’s estimate for 225k. Separately, the ISM Manufacturing Index slid to 51.5 in March which also missed estimates. On a positive note, the Markit ($MRKT) US Manufacturing PMI rose to 55.7 last month which beat estimates for 55.3. Construction spending fell – 0.1% in February after falling a downwardly revised -1.7% (from -1.1%) in January. Economists expected a decline of 0.3%. The weekly MBA Mortgage Index jumped +4.6% to follow last week’s 9.5% big jump. On Friday, the Labor Department said US employers added 126k new jobs in March which missed the 225k estimate. It also snapped a 12-month streak of >200k. The stock market was closed for the holiday but futures fell hard after the jobs report was released. The big miss, coupled with a series of weaker-than-expected economic data bodes poorly for the economy which in turn will likely cause the Fed to keep rates very low for the foreseeable future. Once market participants realize and accept this truth – stocks will likely resume their powerful uptrend.
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrating its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-March 2000 & Oct 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.
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