Last week saw the markets extend the recent rally as earnings season continued and political drama heightened.
Regarding equities, two important happenings last week.
First, domestic investors ignored Chinese weakness and pushed up U.S. stocks anyways. Second, the S&P 500 was able to push through the 1945 ceiling that has served to push stocks lower every time they've met since the year began. Officially allowing the index to recoup 50 percent of the losses from the December high. Moreover, it pushed the index above its 50-day moving average for the first time this year. That's the most moxie bulls have shown in months.
Much of the market's momentum was derived from oil's positive trajectory. Having risen markedly throughout the week.
Don't get too excited, however. History shows that at time like these, indexes will typically be short-term overbought and need to consolidate for a bit. Gathering strength in order to attempt the next push higher. But for now, the market continues to run up. The S&P 500 has another 25-30 points before it reaches its 20-month exponential moving average. At which point it will either have enough velocity to bust on through. Or, it will kiss the average, turn tail and head lower.
We can't help but wonder if the ol' contrarian trap has been set. So many investor outlooks have gone negative recently. Could the market be setting them up for a sucker-punch rally? Sort of feels that way.
With the March Fed meeting soon at hand, that could be just the catalyst. Think about it. Deutsche Bank anticipates a near-term bump in the unemployment rate to 5 percent. Which, in tandem with other souring data points, would make a March rate hike difficult. And as we've learned, nothing grabs investor's heartstrings more than a dovish Fed alluding to a slow and methodical approach to rate normalization. Could be just the catalyst to unexpectedly send equities higher. Because the economic data will not get it done.
Manufacturing continues to fall. Inflation remains absent. The unemployment rate may even tick up this month. And the once-burgeoning housing market is shrinking before our eyes as new and pending home sales fall.
The December S&P/Case-Shiller home price index -- which measures home price levels for 20 cities around the country -- shows the average city remains 12 percent below its prior housing bubble high reached at the housing peak in 2005 and 2006. Yet, the average city now sits 43 percent above the housing bust low reached in 2011.
Las Vegas, Phoenix, Miami, Tampa and Chicago have a long way to get back to their prior highs. No wonder Nevada primary voters were so angry.
Conversely, Dallas, Boston, Portland and San Francisco have fully recovered, surpassing prior highs.
I've recently spent time in Miami Beach and Park City, Utah. Both being magnets for wealthy individuals looking for sun or ski. In both, the evidence of commercial of residential construction was undeniable. Cranes. Equipment. Construction workers.
Point is, parts of the country continue to struggle. But not the wealthy ones. Real estate markets like Miami Beach, Park City, Manhattan and the myriad other regions catering to the affluent have seen a full recovery and then some. When might that cycle run its course? Will regions yet to recover do so before the nation sees its next downswing? Precisely the questions we need ask.
As importantly, the nation's real estate market is further evidence as to the growing disparity between haves and have-nots. Which happens to be one of the dynamics driving the rise of populist candidates like Trump and Sanders.
The electoral class -- the most important American class of all -- has lost faith in the duopolists running the nation. Increasingly, it appears resigned in its desire to deliver a strong message. Essentially screaming, enough is enough!
Central banks have zealously attempted to use monetary policy to fill the void. To little end. As results have been insufficient to help the middle classes in the U.S. and Europe. While the Fed and the ECB unleashed one acronym after another, including NIRP, ZIRP, TARP and QE, the results have not lifted all boats. But for a few yachts belonging to the wealthiest among us. Leaving many to ponder if central banks spent all their ammo just to prop up the same banking class it rescued in 2009. Another chink in the armor of formerly infallible central bankers.
In the oil fields, prices surged last week. Even while many producer nations continue to sustain financial damage by ongoing low prices.
As long as oil remains in the $30-40 range, sovereign wealth funds in nations like Russia, Norway, Saudi Arabia, Qatar and UAE must continue to sell off assets for liquidity purposes.
These funds held around $7 trillion during the heyday. In 2014, however, the Sovereign Wealth Fund Institute (SWFI) reported that assets were down to $3.2 trillion. And have fallen since. In fact, the SWFI reports that the funds will likely sell off another $400 billion in global equities this year to account for plummeting revenues.
Not a good time to be sitting atop a surplus of dinosaur goo.
Bottom line? The S&P 500 may not yet be in the requisite negative 20-percent territory. Yet we inhabit a bearish cycle, nonetheless.
Good news? March and April tend to rank among the better months of the year for stocks. Rallies may offer an opportunity to lighten up. Or at least review profitable positions. And cull weaker ones.
Given everything transpiring, the weeks ahead will be interesting. We suspect that index could forge as high as the 2,050 level. Once there, however, bears will be ferocious. And unless oil continues to surge, we're not sure what will send stocks higher thereafter. Macroeconomic headwinds continue to mount, regardless of the blather from central bankers. Stay tuned.
Weekly Results
Major markets finished up last week. The DJIA gained 1.51%, the S&P 500 jumped 1.58%, and the NASDAQ rose 1.91%. Small cap stocks gained 2.69%. Also, the 10-year Treasury bond yield rose 1 basis point to 1.76%. Gold finished down $3.65 per ounce, or -0.30% last week.
