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Weekly Review - February 16, 2016

Weekly Review - February 16, 2016

Guest Post - Tuesday, February 16, 2016


  • Economic data last week was decent, highlighted by better-than-expected retail sales and lower jobless claims, while consumer sentiment fell somewhat.
  • Stock markets experienced another down week, as concerns over global growth and oil prices continued to dominate sentiment; U.S. equities outperformed foreign. Bonds fared well as investors fled away from risk assets, which also helped precious metals continue their strong run this year.

Economic Notes

(+) Retail sales for January rose +0.2%, which was better than the +0.1% increase expected. Retail sales ex-autos and 'core', which removes the volatile monthly components, also gained, up +0.6% compared to an expected +0.3% increase. Large increases included the area of non-store retail (which is basically online sales), which rose +1.6% in a continued pattern of expansion in this segment, as well as general merchandise and apparel. There have been concerns about retail sales, in light of a soft patch in other segments of the economy, but the consumer has proven to be fairly resilient as of late.

(0) Import prices in January fell -1.1%, which was not as dramatic as the -1.5% drop expected. Imported energy pricing was the primary driver of the series, as petroleum prices fell -13% for the month (-35% over the trailing 12 months) and prices of industrial supplies fell -5%. To no surprise, a strong U.S. dollar and sharply weaker commodity prices overall have contributed to a lack of imported inflation. Despite the market uncertainty and mixed sentiment involving the strength of the dollar and collapse in oil and other commodities, the effect of low input costs is a strongly positive economic influence, although it's been somewhat underreported and perhaps underappreciated.

(0) Wholesale inventories fell by -0.1% for December, which was less than the expected -0.2% drop; however, revisions for prior months were also down, making a small change less meaningful. What late-quarter inventories often serve to do is tweak the timing of GDP growth from one quarter to another. In this particular case, the fourth quarter may turn into a bit of a drag while the contribution to first quarter GDP might be slightly positive.

(-) The preliminary University of Michigan sentiment index for February fell just over a point from 92.0 to 90.7, contrary to expectations calling for a small gain to 92.3. Consumer assessment of current conditions fell just under a point while expectations for the future fell nearly -2 points. While expectations for inflation over the next year were unchanged at 2.5%, interestingly, expectations for long-term (5-10 years out) inflation fell from 2.7% last month to 2.4%, which now represents a new all-time low in the series. Perhaps the long-standing low inflation environment is beginning to turn into complacency, especially with the deluge of deflation talk through the media.

(+) JOLTS job openings for December rose to 5.61 mil. from 5.35 mil. the prior month and more than the 5.41 mil. level expected. Large percentage gains were seen in manufacturing of both durable and non-durable goods, trade/transports/utilities as well as in government. The overall hire rate was unchanged at 3.7%, while the quit rate moved higher by a tenth to 2.1%.

(+) Initial jobless claims for the Feb. 6 ending week fell to 269k, which was below the expected 280k mark. Continuing claims for the Jan. 30 week similarly fell to 2,239k, which was below the 2,245k expected. No special factors appeared to be at play, and the recent results somewhat reversed a trend towards higher claims results in recent weeks.

(0) Fed Chair Janet Yellen proceeded through her periodic 'Humphrey Hawkins' Congressional testimony last week. Perhaps more than usual, markets were very interested in her tone—would Fed rate increases likely continue as initially expected or would recent weakness slow down this pace? It appeared from her comments that additional hikes this year are the base case in a very gradual fashion, but the entire situation remains data dependent. So, nothing new was really said.

From the market's perspective, the likelihood of a rate increase in March has deteriorated from 10-20% down to zero at this point, and probabilities for a June move are far lower as well. In fact, a rate increase at all in 2016 has become less likely in the minds of futures market participants. More noted below, but she acknowledged an environment 'less supportive of growth', particularly due to international developments, while lower interest rates and low gas/oil prices were a positive. Financial conditions have also tightened from a non-policy perspective, with weaker equities, wider credit spreads and a continued strong dollar, which in many ways can serve the same purpose as a rate increase by the Fed.

Read the "Questions of the Week" for February 16, 2016:

Why is the market reacting so violently this year? Should I just move everything to cash until things calm down?

Market Notes

Period ending 2/12/2015

1 Week (%)

YTD (%)




S&P 500



Russell 2000









BarCap U.S. Aggregate



U.S. Treasury Yields

3 Mo.

2 Yr.

5 Yr.

10 Yr.

30 Yr.



















U.S. stocks were largely down on the week with continued energy volatility and global growth concerns, not to mention uncertainty about Fed interest rate policy (Janet Yellen's side comment before Congress noting that negative rates are always an option in the toolkit). From a sector standpoint, more defensive consumer staples led the way, gaining a percent on the week, while financials, utilities and materials all lost generally over -2%. Small caps remain pressured, being in -20% bear market territory at this point. With three-quarters of S&P companies now having reported Q4 results, the outcome has been revenues in line with expectations and earnings ahead of expectations by almost +5%. Of course, including energy, EPS growth for the entire index ended up negative, while ex-energy, results translated to a +4% gain.

Overseas, emerging markets, particularly in the Asia-Pacific region fared best with minimal losses, although Chinese local A-share markets were closed for the weeklong Chinese New Year. While most markets fell within a generally tight band, Japanese equities underperformed the group dramatically, falling -10% in both local and USD terms (worst week there since the '08 financial crisis) and falling into bear market territory upon bond yields breaching negative territory temporarily and a stronger yen. European bank stocks have been similarly pressured as of late, with the specter of negative rates weighing on earnings and continued sluggish growth perhaps putting strains on loan portfolios.

In the U.S., government bonds fared well as interest rates fell across the longer-end of the yield curve, benefitting bonds at the 10-year area and longer. However, credit spreads widened, resulting in corporate debt losing ground on the week. High yield indexes were at the low end of the spectrum for the week, losing nearly -2% on continued energy price volatility. Internationally, the dollar fell again by -1%, which benefited dollar-denominated indexes over local. Generally, this effect aside, global safe haven issuers, such as Germany, Japan and the U.K., fared best on the week while the results of emerging market issuers were mixed.

Commodities, fell dramatically early in the week, led by crude oil which moved from $31 to just above $27, before rebounding Friday to near $29.50 for the biggest one-day gain in 7 years. Despite the deceivingly small apparent dollar moves around this level, on a percentage basis these can approach +/- 10% a day. The late week gains were apparently due to more OPEC rumors; this time about a potential production cut to stabilize/boost prices. One of 2016's winners, gold, also experienced sharp gains of +7% for the week as market volatility sent investors again toward safe haven assets and low treasury real yields were apparently a less compelling option.

Real estate indexes in the U.S. fell over -4% for the most part, generally underperforming broader equities. Economically-sensitive lodging/resorts actually fared best on the week, bucking recent trends, followed by retail/malls, timber and healthcare suffered the most with larger losses. Global returns differed by region, but all performed in a similar pattern to the U.S. for the week.

Have a good week.

Sources: FocusPoint Solutions, American Association for Individual Investors (AAII), Associated Press, Barclays Capital, Bloomberg, Deutsche Bank, FactSet, Financial Times, Goldman Sachs, JPMorgan Asset Management, Kiplinger's, Marketfield Asset Management, Minyanville, Morgan Stanley, MSCI, Morningstar, Northern Trust, Oppenheimer Funds, Payden & Rygel, PIMCO, Rafferty Capital Markets, LLC, Schroder's, Standard & Poor's, The Conference Board, Thomson Reuters, U.S. Bureau of Economic Analysis, U.S. Federal Reserve, Wells Capital Management, Yahoo!, Zacks Investment Research. Index performance is shown as total return, which includes dividends, with the exception of MSCI-EM, which is quoted as price return/excluding dividends. Performance for the MSCI-EAFE and MSCI-EM indexes is quoted in U.S. Dollar investor terms.

The information above has been obtained from sources considered reliable, but no representation is made as to its completeness, accuracy or timeliness. All information and opinions expressed are subject to change without notice. Information provided in this report is not intended to be, and should not be construed as, investment, legal or tax advice; and does not constitute an offer, or a solicitation of any offer, to buy or sell any security, investment or other product. FocusPoint Solutions, Inc. is a registered investment advisor.

Notes key: (+) positive/encouraging development, (0) neutral/inconclusive/no net effect, (-) negative/discouraging development.

Additional Reading

Read the previous Weekly Review for February 8, 2016.

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