February 22, 2016 - Stocks Post Best Week of 2016

February 22, 2016

Markets closed out their best week of the year last week, buoyed by higher oil prices and positive economic data that reassured some recession worriers. For the week, the S&P increased 2.84%, the Dow grew 2.62%, and the NASDAQ added 3.85%.^[1]

After tumbling for weeks, oil prices stabilized close to $30/barrel after several major oil producers-including Saudi Arabia, Russia, Qatar, and Venezuela-announced their willingness to freeze production levels to fight low prices. It's not clear that the deal will go anywhere since other countries are refusing to participate.^[2] Since cutting production will only work if all or most oil producers commit to collective action, it's not certain that oil prices have ended their declines. However, the temporary pause was enough to give markets a boost.

A key barometer of prices in the U.S.- the Consumer Price Index - showed that core inflation rose 2.2% over the last 12 months.^[3] A modest rise is good news because it shows that there is demand pushing up prices. Demand means that the economy continues to grow. However, the increase is small enough that it's not likely to trigger another interest rate increase by the Federal Reserve any time soon.

On the negative side, the current manufacturing picture is bleak. Two reports released last week show that the manufacturing sector is still contracting, a victim of a decline in global demand for manufactured goods. However, some portions of the sector that depend on domestic demand are doing well.^[4]

The official minutes from January's Federal Reserve Open Market Committee meeting show that officials are concerned by how global risks may affect the domestic growth picture. This isn't news to investors, and markets didn't react very much to the release. Overall, the FOMC intends to be cautious in moving ahead with rate increases, though they are holding to their medium-term positive outlook on the U.S. economy.^[5] We're not likely to see a rate increase in March or April. Currently, the latest Wall Street Journal poll of economists shows June as the odds-on favorite for the next rate hike.[6] We're not holding our breath.

The week ahead is packed with important economic data, including the second release of fourth-quarter GDP, consumer sentiment, international trade, and consumer spending. Will last week's optimism hold? Possibly, if we get more good news. However, it's likely that we'll see additional volatility in the days and weeks ahead.

ECONOMIC CALENDAR:

Monday: PMI Manufacturing Index Flash
Tuesday: S&P Case-Shiller HPI, Consumer Confidence, Existing Home Sales
Wednesday: New Home Sales, EIA Petroleum Status Report
Thursday: Durable Goods Orders, Jobless Claims
Friday: GDP, International Trade in Goods, Personal Income and Outlays, Consumer Sentiment

_{Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.}

HEADLINES:

Housing starts drop in January. Groundbreaking on new homes fell 3.8%, surprising economists who expected to see a rise. Seasonal factors like the large blizzard that blanketed the East Coast could be responsible.^[7]

Jobless claims fall unexpectedly. The number of Americans filing new claims for unemployment benefits fell last week, pointing to renewed strength in the labor market.^[8]

Mortgage applications rise on lower rates. Falling rates on mortgages continue to drive purchase applications and refinancing activity. Applications for home purchases are up 30% over the same period last year.^[9]

Home builders may be losing confidence. An indicator of optimism among the nation's home builders shows that though current and future sales expectations are strong, a lack of labor and available lots may be dragging on future building.^[10]

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