21.03.2016, 00:08
Ameriprise Financial: Risk Assets Rally, But How Long Will It Last?
OREANDA-NEWS. March 21, 2016. Oil climbed last week for a third straight week, and so did stocks. In fact, so did just about every category of risk assets. High yield bonds, gold and foreign stocks all enjoyed a week of gains. In contrast, equity volatility fell along with the dollar and Treasury yields rose. So it was another good week for those who are long. The S&P 500, which managed to close tantalizingly close to the 2,000 mark, has managed to claw back to within 2.2 percent of breaking even on the year.
There was another round of encouraging economic reports in the U.S. last week that served to quiet the talk of recession. The decline of the manufacturing sector slowed while services stayed firm, construction spending and factory orders rose, and motor vehicle sales remained healthy. Most importantly, the labor market added many more jobs than expected, increasing the odds of a Fed rate hike in June to 40 percent from 35 percent the week prior, based on data from the Fed funds futures market.
Weakness overseas
The diverging paths of the domestic and international economies continue to overshadow the market. Weakness in the Eurozone, including the reemergence of deflation, makes this week’s European Central Bank (ECB) meeting particularly noteworthy. Widespread speculation anticipates a further reduction in the already negative deposit rate, despite a warning over the weekend from the Bank for International Settlements that the use of negative interest rates remains experimental. China also made headlines over the weekend by announcing its latest growth objective of 6?-7 percent for 2016, in line with recent experience, at least officially. Skeptics continue to worry that such a target means that true reform of industrial overcapacity and the write down of bad debt will be delayed, only postponing the day of reckoning, and making a steady devaluation of the currency more likely.
Oil’s climb
Back in the oil patch, the weekly active rig count fell to a six-year low as U.S. production has slowed from 9.5 to 9.1 million barrels a day. Talk of a meeting in late March to discuss a production freeze involving OPEC and other major producers – with a whisper objective of supporting a \\$50 a barrel price objective – lent further support to the market. But crude in storage remains high. In the U.S., stockpiles are at their highest since the 1930s.
Earnings forecast lowered
On the domestic earnings front, it has not taken long for this year’s initial expectations to be upended. According to Factset, at the start of the year first quarter earnings were expected to be basically flat. That forecast has been lowered to the point where a decline of 8 percent is now expected. Not surprisingly, energy and materials are the primary source of weakness. But every sector in the index has seen expectations reduced to a point where now only telecom, consumer discretionary, and healthcare are expected to post an actual increase in earnings compared to last year. For the full year 2016 earnings are now expected to expand by just 2.9 percent, compared to 6.8 percent two months ago.
Little has been done to address the structural problems confronting the global economy, while reliance on monetary stimulus continues to be the primary tool favored by policymakers in the absence of political will to reform. This week’s ECB meeting should offer further evidence of that. A combination of a firming oil price, a stable Chinese currency, and some better domestic economic data has allowed risk assets to rally in the short-term. They will likely need each of these supports if the rally is to be extended.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Investment products are not federally or
FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
There was another round of encouraging economic reports in the U.S. last week that served to quiet the talk of recession. The decline of the manufacturing sector slowed while services stayed firm, construction spending and factory orders rose, and motor vehicle sales remained healthy. Most importantly, the labor market added many more jobs than expected, increasing the odds of a Fed rate hike in June to 40 percent from 35 percent the week prior, based on data from the Fed funds futures market.
Weakness overseas
The diverging paths of the domestic and international economies continue to overshadow the market. Weakness in the Eurozone, including the reemergence of deflation, makes this week’s European Central Bank (ECB) meeting particularly noteworthy. Widespread speculation anticipates a further reduction in the already negative deposit rate, despite a warning over the weekend from the Bank for International Settlements that the use of negative interest rates remains experimental. China also made headlines over the weekend by announcing its latest growth objective of 6?-7 percent for 2016, in line with recent experience, at least officially. Skeptics continue to worry that such a target means that true reform of industrial overcapacity and the write down of bad debt will be delayed, only postponing the day of reckoning, and making a steady devaluation of the currency more likely.
Oil’s climb
Back in the oil patch, the weekly active rig count fell to a six-year low as U.S. production has slowed from 9.5 to 9.1 million barrels a day. Talk of a meeting in late March to discuss a production freeze involving OPEC and other major producers – with a whisper objective of supporting a \\$50 a barrel price objective – lent further support to the market. But crude in storage remains high. In the U.S., stockpiles are at their highest since the 1930s.
Earnings forecast lowered
On the domestic earnings front, it has not taken long for this year’s initial expectations to be upended. According to Factset, at the start of the year first quarter earnings were expected to be basically flat. That forecast has been lowered to the point where a decline of 8 percent is now expected. Not surprisingly, energy and materials are the primary source of weakness. But every sector in the index has seen expectations reduced to a point where now only telecom, consumer discretionary, and healthcare are expected to post an actual increase in earnings compared to last year. For the full year 2016 earnings are now expected to expand by just 2.9 percent, compared to 6.8 percent two months ago.
Little has been done to address the structural problems confronting the global economy, while reliance on monetary stimulus continues to be the primary tool favored by policymakers in the absence of political will to reform. This week’s ECB meeting should offer further evidence of that. A combination of a firming oil price, a stable Chinese currency, and some better domestic economic data has allowed risk assets to rally in the short-term. They will likely need each of these supports if the rally is to be extended.
Important Disclosures:
The views expressed are as of the date given, may change as market or other conditions change, and may differ from views expressed by other Ameriprise Financial associates or affiliates. Actual investments or investment decisions made by Ameriprise Financial and its affiliates, whether for its own account or on behalf of clients, will not necessarily reflect the views expressed. This information is not intended to provide investment advice and does not account for individual investor circumstances.
The S&P 500 is an index containing the stocks of 500 large-cap corporations, most of which are American. The index is the most notable of the many indices owned and maintained by Standard & Poor's, a division of McGraw-Hill.
Investment decisions should always be made based on an investor's specific financial needs, objectives, goals, time horizon, and risk tolerance. Investment products are not federally or
FDIC-insured, are not deposits or obligations of, or guaranteed by any financial institution and involve investment risks including possible loss of principal and fluctuation in value.
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