The past week featured relatively few significant data releases, with perhaps the most notable being Thursday's report on monthly retail sales. U.S. retail sales fell for the third straight month, declining 0.6% in February, after also falling in January and December. The weakness in February was broad-based with spending falling at restaurants, auto dealers and department stores. However, spending at gas stations actually increased for the first time since May 2014, as prices at the pump nudged modestly higher. For perspective, though, retail sales were still up 1.7% vs. a year earlier and harsh winter weather in the Northeast likely contributed to some of the sluggish report. Retail sales data can also be very volatile and the weakness of the past three months does follow a very strong period in the second half of 2014.
For the week, the S&P 500 lost -0.86%, the Dow Jones Industrial Average fell -0.60%, and the MSCI EAFE (developed international) dropped -1.72%.
Here are the 3 stories this week that rose above the noise:
Hot Topic - Can Stocks Rise When Dollar Is Strong?
The financial markets are eagerly awaiting this week's Federal Reserve policy meeting looking for clues as to the possible timing of any changes to interest-rate policy and how this might impact the currency markets. Can U.S. equity markets rally further if the U.S. dollar continues to strengthen?
While individual companies and sectors can potentially be significantly impacted, a recent Goldman Sachs study found that the S&P 500 index is indifferent to currency moves. "Since 1981, the median annualized return of the index was nearly identical in both strong and weak U.S. dollar cycles." Also, hikes in interest rates do not necessary portend a stock market selloff. Following the last 15 Federal Reserve interest-rate increases, the S&P 500 has actually risen, on average, 0.8% one month after the first hike.
First Rate Hike now Likely in August: CNBC
Fed Survey Investors will find out tomorrow if the U.S. Federal Reserve drops its use of the word "patient" from its policy statement. The word has been used by the central bank to signal no rate hike for at least two meetings. According to a recent CNBC poll, economists, analysts and money managers now see the first rate hike coming in August, a month ahead of the prior survey. However, rates are still forecast to rise gently, peaking at 3.04% in this cycle by the fourth quarter of 2017. According to one strategist, it will take the Fed years to normalize rates, suggesting the bull market still has room to run.
For some global perspective, the number of central banks that are currently in a monetary easing cycle reached 24 following an interest-rate cut by South Korea last week. Low inflation and weak economic growth are the main catalysts for the rising number of central banks that are implementing interest-rate cuts. Oil prices have declined dramatically since last June, which has put downward pressure on inflation rates. The United States, however, is expected to raise interest rates this year despite dealing with low inflation. The expected divergence in monetary policy between the United States (tightening) and many central banks globally (easing) has helped contribute to the U.S. Dollar index reaching a 12-year high.
Surprise: U.S. Economic Data Have Been the World's Most Disappointing
As the Federal Open Market Committee (FOMC) gets set for a highly anticipated two-day meeting that may see them set the stage for raising interest rates as early as June, recent economic data in the United States has been generally disappointing. In fact, relative to consensus expectations, U.S. economic data has been the most disappointing in the world.
This doesn't necessarily mean a period of prolonged economic weakness is at hand, as high expectations and harsh weather have likely played some role in the disappointing data. However, if the Fed continues to emphasize that rate hikes will be dependent on incoming data, a continuation of disappointing economic reports in the coming weeks would likely reduce the probability that the Fed initiates its rate hikes before September.
Articles chosen and summarized by the First Allied Asset Management, Inc. investment management team. First Allied Asset Management provides investment management and advisory services to a number of programs sponsored by First Allied Securities and First Allied Advisory Services. First Allied Asset Management individuals who provide investment management services are not associated persons with any broker-dealer.
International investing involves additional risk, including currency fluctuations, political or economic conditions affecting the foreign country, and differences in accounting standards and foreign regulations. These risks are magnified in emerging markets. Investing in companies involved in one specified sector may be more risky and volatile than an investment with greater diversification.
