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Weekly Vantage Point | Week of 4.4.2016

 
Fed Rate Caution Sends Stocks Higher

April 4, 2016 – The S&P 500 advanced last week, completing its sixth weekly gain in the past seven weeks and finishing at its highest closing level of the year. The week was defined by a market-friendly speech delivered by Federal Reserve Chair Janet Yellen on Tuesday to the New York Economic Club, where she said she is in no rush to raise rates amid a sluggish global economy. Her stance that the Fed must "proceed cautiously" quashed rate hike expectations stirred by comments from several Fed district presidents that a rate hike could come as soon as April. The dovish stance helped equities conclude their largest quarterly turnarounds since the Great Depression.

In other key economic data last week, Commerce Department officials said personal incomes rose 0.2% in February, down from a larger increase the month prior, but higher than forecast, while spending rose 0.1% for a third month. Home prices continue to trend higher and the Conference Board's reading of consumer confidence increased for March. All three U.S. automakers posted March sales gains, although they missed analysts' estimates, with the overall annualized sales pace slowing to the lowest level in 13 months. The week culminated with continued gains in employment, with payrolls increasing by 215,000 in March, down slightly from an upwardly revised increase in February. Hourly earnings climbed more than expected, while the headline unemployment rate edged higher to 5% from 4.9% the month prior.

For the week, the S&P 500 rose 1.84%, the Dow Industrials gained 1.58% and the NASDAQ Composite surged 2.97%. Nine of the ten major sector groups advanced, led by Technology (+2.73%), Consumer Staples (+2.65%) and Consumer Discretionary (+2.52%). Energy (-1.26%) lagged after a Saudi Arabia official said the nation would only agree to an oil production freeze if Iran joined the agreement. WTI crude oil futures retreated by over 6.7% last week, ending at $36.79/barrel. Treasuries rallied over the week, with the yield on 10-year Treasury notes declining by 13 basis points to end at 1.771%.

 
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Week’s Economic Calendar
 

Monday, April 4: Factory Orders;

Tuesday, April 5: U.S. Trade Deficit, JOLTS, ISM Non-Mfg Index;

Wednesday, April 6: MBA Mortgage Applications, FOMC Meeting Minutes;

Thursday, April 7: Jobless Claims;

Friday, April 8: Wholesale Trade.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones 1.58% 0.61% 2.11% 2.11% 6.88%
S&P 500 1.84% 0.63% 1.99% 1.99% 2.82%
NASDAQ 2.97% 0.92% -1.53% -1.53% 1.90%
Russell 3000 2.05% 0.59% 1.56% 1.56% 0.61%
MSCI EAFE -0.21% -2.14% -5.08% -5.08% -10.34%
MSCI Emerging Markets 1.74% -1.26% 4.47% 4.38% -13.05%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.58% -0.04% 2.99% 2.99% 1.60%
Barclays Municipal 0.50% 0.06% 1.73% 1.73% 3.95%
Barclays US Corp High Yield 0.33% -0.01% 3.34% 3.34% -3.72%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -1.65% -1.12% -0.71% -0.71% -21.84%
S&P GSCI Crude Oil -6.77% -4.04% -0.67% -0.67% -26.51%
S&P GSCI Gold 0.00% -0.98% 15.40% 15.40% 1.26%
Source: MorningStar
Chart of the Week: The Consumer Spending Conundrum; Incomes Rise, Spending Slows
chart
View larger image »
 

The chart above shows real consumer spending increased at a moderate 0.2% seasonally-adjusted monthly rate in February, but the January figure was revised lower to unchanged from 0.4%. This in turn reduced the tracking estimate of 1Q 2016 real consumer spending growth from 2.9% to just 1.7% (seasonally-adjusted annual rate, SAAR). January real spending on goods was revised down to minus 0.3% (from +0.7%) and spending on services was revised down to +0.1% (from +0.3%).

On the other hand, real disposable income, through the first two months of the quarter, was up a solid 3.4% (SAAR), so the slowdown in spending reflects an abrupt increase in the saving rate, from a 5% average in 4Q 2015 to 5.4% in February. Unfortunately, there is no obvious reason for the spending slump, although the sharp decline in equity prices early in the year may have discouraged spending. If this is the case, then we would expect a rebound in spending relatively soon. However, data on Friday showed unit auto sales were tracking at 16.6 million for March, down from 17.4 million the month before and the weakest pace since February 2015. Confounding matters further, auto makers spent an average of $3,110 on sales incentives per vehicle sold last month, 14% more than a year earlier and up slightly from February, according to Autodata Solutions.

 
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The Barclays U.S. Aggregate bond Index is an unmanaged index composed of Barclays Credit government bond index, mortgage backed securities index, and asset backed securities index and is generally representative of the US Bond market.

The Barclays U.S. Corporate High Yield Index measures the market of USD-denominated, non-investment grade, fixed-rate, taxable corporate bonds. Securities are classified as high yield if the middle rating of Moody's, Fitch, and S&P is Ba1/BB+/BB+ or below, excluding emerging market debt.

The Barclays U.S. Municipal Bond Index is an unmanaged, market-value-weighted index of investment-grade municipal bonds with maturities of one year or more.

The Bloomberg Commodity Index is a broadly diversified index that allows investors to track commodity futures through a single, simple measure. It is composed of futures contracts on physical commodities and is designed to minimize concentration in any one commodity or sector. It currently includes 19 commodity futures in five groups. No one commodity can comprise less than 2% or more than 15% of the index, and no group can represent more than 33% of the index (as of the annual reweightings of the components).

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CRB Index: A pricing index that measures changes in the price of 22 commodities that are believed to be among the first to react to changes in economic conditions.

The Consumer Price Index (CPI) is a measure of the average change over time in the prices paid by urban consumers for a market basket of consumer goods and services.

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The S&P GSCI Gold Index, a sub-index of the S&P GSCI, provides investors with a reliable and publicly available benchmark tracking the COMEX gold future.

The S&P GSCI Crude Oil Index is a sub-index of the S&P GSCI and provides investors with a publicly available benchmark for investment performance in the crude oil market.

The S&P MidCap 400® provides investors with a benchmark for mid-sized companies. The index, which is distinct from the large-cap S&P 500®, measures the performance of 400 mid-sized companies, representing more than 7% of available market cap.

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West Texas Intermediate (WTI) is a crude oil stream produced in Texas and southern Oklahoma which serves as a reference or "marker" for pricing a number of other crude streams. WTI is the underlying commodity of the New York Mercantile Exchange's oil futures contracts.

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