Stocks End Mixed On Tepid Economic Data
Stocks ended mixed during the shortened holiday week as investors digested the latest round of weaker-than-expected economic data. The self-described data-dependent Fed will likely err on the side of keeping rates low for the foreseeable future because the “data” remains very weak. The Fed has held rates near zero since the 2008 financial crisis and has engaged in three rounds of massive QE (printing money). Even after all this, the Fed finds itself between a rock and a hard place. The Fed has a dual mandate, steady economic growth and keep inflation around 2%. Right now, they are failing on both fronts. Deflation remains more of a threat than inflation and the “data” suggests the economy remains very weak (and possibly contracted in Q1). In addition, Q1 earnings are projected to be negative which is not ideal. All this tells us that the Fed will continue to err on the side of EASY MONEY for the foreseeable future.
Monday & Tuesday’s Action: Economic Data Remains Weak
The Dow Industrial average soared nearly 300 points on Monday after two important Fed officials came out and basically reiterated their case for “easy money.” After Friday’s (3/27’s) close, Janet Yellen gave a speech and basically said the Fed remains data dependent and will err on the side of keeping rates lower, until needed. Then Sunday night, futures barely budged so before Monday’s open (6am EST), Ben Bernanke turned into a blogger and of course his first blog post made the case for keeping rates near zero for the near future. The Yellen/Bernanke one-two punch was enough to send stocks nicely higher on Monday. Overseas, China’s Central Bank said they are ready to lower rates and bank reserve requirements to fight deflation, if needed. This is their way of saying that they will gladly join the international central bank easy money parade, if needed. Economic data was mixed on Monday. Personal income beat estimates but personal spending fell short. The closely watched PCE deflator, which is the Fed’s preferred inflation measure, rose +1.4% year-over-year, which barely topped the +1.3% forecast. Separately, the Dallas Fed manufacturing Activity Index plunged by -17.4, widely missing estimates.
Wednesday & Thursday’s Action: Jobs Report Disappoints
Market Outlook: The Central Bank Put Is Alive And Well
Remember, in bull markets surprises happen to the upside. This has been our primary thesis since the end of 2012. We would be remiss not to note that this very strong bull market is aging (celebrated its 6th anniversary in March 2015) and the last two major bull markets ended shortly after their 5th anniversary; 1994-2000 & 2002-Oct 2007). To be clear, the central bank put is very strong and until material damage occurs, the stock market deserves the longer-term bullish benefit of the doubt. As always, keep your losses small and never argue with the tape.