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Equities continued their push higher this week and both the Dow Jones and S&P 500 closed out the first quarter in the green following an awfully rocky start to the year. Although oil prices retreated on continued oversupply concerns and news that Saudi Arabia may not comply with any agreement to curb production, Federal Reserve Chair Janet Yellen's dovish remarks on the U.S. economy and future outlook for interest rates helped fuel a rally on Tuesday that set the tone for the week. Then, a largely in-line jobs report on Friday was enough to demonstrate continued strength in the domestic economy without reigniting any concerns for a sooner-than-expected rate hike. We expect the Fed to remain focused on monitoring international headwinds.
Treasury yields moved steadily lower; the dollar ended weaker against the euro following Yellen's remarks; gold was higher for much of the week but ended it lower; and both West Texas Intermediate and Brent crude ended the week lower.
Fourth-quarter equivalent earnings were relatively mixed, but somewhat positive compared with expectations, with 69.3% of companies surprising to the upside vs. estimates. No companies in the portfolio reported earnings this week.
On the economic front, the National Association of Realtors reported on Monday that pending home sales shot up 3.5% in February to a reading of 109.1 on the index, the highest level in seven months. Expectations had called for a 1.2% increase on the index, which, at 100, indicates a balanced housing market for the current U.S. population. The index helps measure future closed sales, providing us a peek into upcoming months, as pending sales typically close within one or two months of signing. The latest data are a nice uptick from January's results, which were certainly impacted by harsher winter conditions. The reading comes a week after a disappointing existing home sales report but a better- than-expected figure on new home sales. Housing has remained a bright spot for the U.S. economy despite other weakening sectors, and February's report should indicate some further support in coming months.
On Tuesday, Yellen struck a cautious tone around the pace of future rate hikes in a speech before the Economic Club of New York. In her prepared remarks, Yellen reiterated that macro uncertainty, global market volatility and an uncertain inflation outlook justify a slower path toward higher interest rates. Crucially, the remarks seemed to highlight the debilitative impact of a sky-high dollar on the U.S. economy, which we view as key since the strong dollar renders any domestic business that sells its products overseas uncompetitive. Importantly, Yellen's statement also shed light on the fragility of the recovery in Europe, China, Latin America, Canada and beyond.
When it comes to probably the most worrisome global economy for investors ¿ China -- Yellen expressed uncertainty about how smoothly the country's transition toward consumption and domestic sources of growth (rather than export-driven) will proceed, and openly questioned the central government's ability to properly manage any financial market volatility, uncertainty and confusion (as evidenced by its botched attempt to control the yuan earlier this year).
Yellen's dovish speech drove U.S. stocks and gold futures higher, while sending Treasury yields and the U.S. dollar lower. Ultimately, it seems we are in a lower-for-longer rate environment, although we know all too well how quickly the tone can change.
On Thursday, the Department of Labor reported that initial jobless claims for the week ending March 26 were 276,000, which was 11,000 claims higher than the previous week's unrevised figure and higher than expectations for around 265,000. With the latest jump, claims have risen for the third week in a row, and are up a cumulative 9.1% over that time period (the biggest rise since April 2014). However, claims for the week ended March 5 were the lowest since November 1973. The four-week moving average for claims (which is used as a gauge to offset volatility in the weekly numbers) nudged higher by 3,500 claims to 263,250. Claims have remained below 300,000 -- the threshold typically used to categorize a healthy jobs market -- for 56 straight weeks, which is still the longest streak since the early 1970s. This claims data played no role in the broader jobs report, as it fell outside the survey period for March jobs.
On Friday, the Labor Department reported that the U.S. economy added 215,000 jobs in March, a touch above consensus of 213,000, while unemployment nudged to 5% (vs. 4.9% expectations), wages grew 2.3% over the previous year (vs. expectations for 2.2% growth) and the labor participation rate hit 63% (from 62.9% in February). Meanwhile, revisions showed employers added 1,000 fewer jobs in January and February than previously estimated. In the first quarter of 2016, job gains averaged 209,000 a month. While the headline unemployment rate ticked higher to 5% from an eight-year low of 4.9%, it was a result of more Americans returning to the labor force. A broad measure of unemployment that includes Americans stuck in part-time jobs or too discouraged to look for work rose slightly to 9.8% from 9.7% in February (which had been the lowest reading since 2008). In our view, the report was solid but uninspiring, and was not strong enough to change the Fed's rate outlook heading into its April meeting. As long as the Fed remains focused on monitoring international headwinds, we expect U.S. data to have a marginal impact in the absence of extremes.
On the commodity front, crude oil moved lower this week as the trade seems to continuously hit resistance at the $40 level. Prices fell sharply on Tuesday following new output figures from Kuwait and Saudi Arabia. A rally on Wednesday morning, however, gained steam as the dollar weakened, but prices retreated to close out the day as the government reported another weekly build in inventories, noting that stockpiles rose 2.3 million barrels. Even though this was less than the expected 3.3 million barrel build, it still shed light on the persistent oversupply problem that many have seemed to overlook since the oil rally began. The build was more confusing than anything else given that refinery utilization also rose and imports decreased.
A further selloff began Friday after Saudi Arabia's crown prince claimed the country would only freeze its oil output if Iran and other major producers agree to curb their production. A meeting of major oil producing nations is scheduled for April 17, and the talk of a potential freeze is one of the main reasons the oil rally ever gained support, but Iran is not scheduled to appear or cooperate in any agreements. The news follows what we have been saying for weeks: It is nice to dream of a widespread production freeze across major oil producing countries, but the contradicting reports seem to support nothing but smoke and mirrors for the time being, and although prices have moved higher, we still await stabilization.
Fourth-quarter earnings were relatively mixed compared to estimates. Total fourth-quarter earnings growth is down 4.5%; of the 407 non-financials that reported, earnings growth is down 4.9% vs. expectations for a 4.4% decrease. Revenues decreased 3.8% vs. expectations throughout the season for a 3.79% decline. Of the companies reporting, 69.3% beat EPS expectations, 19.5% missed the mark and 11.2% were in line with consensus. On a year-over-year comparison basis, 54.2% beat the prior year's EPS results, 42.4% came up short, and 3.4% were virtually in line. Materials, health care and info tech led the relatively strong performance vs. estimates, whereas consumer staples, telecom and utilities posted the worst results in the S&P 500.