March 2016 Monthly Outlook
The economy has started out slowly in 2016, but not as slowly as 2015 began or ended. One reason is that the weather is less of an issue so far than in either of the past two years. We are seeing resilience in retail, housing starts, building permits and home sales, as well as gains in industrial production and factory utilization. Further, weekly jobless filings remain low. When looking at the economy as a whole, even without assistance from exports or energy-sector capital spending, there is enough underlying strength, especially on the consumer side, for growth to recover to just over 2% this quarter.
“The U.S. LEI fell slightly in January, driven primarily by large declines in stock prices and further weakness in initial claims for unemployment insurance,” said Ataman Ozyildirim, Director of Business Cycles and Growth Research at The Conference Board. “Despite back-to-back monthly declines, the index doesn’t signal a significant increase in the risk of recession, and its six-month growth rate remains consistent with a modest economic expansion through early 2016.”
After last January’s huge drop in the Consumer Price Index (CPI), the index has steadily increased in the past 12 months, as the core CPI has crept over the Fed’s 2% target. This should put further pressure on the Federal Reserve to continue increasing short term rates.
Indicators point to the US economy being in the late stages of a long business up-cycle without major excesses that brought down some prior economic upturns. With core inflation meeting the Federal Reserve’s inflation target, the Federal Reserve has ended their unprecedented zero interest policy and has shifted to a less accommodative monetary policy.
Stock and Bond Market Commentary:
US stocks were roughly flat in February as the S&P500 index decreased 0.08%, and is down over 6% in the past 12 months. Investors continued to shun risky assets last month, opting instead for the safety of bonds and causing the bond index to increase 0.89%. Overall, the stock market’s returns have stalled in the past 12 months. This is mainly because the growth in corporate earnings peaked in 2014 and has been steadily declining since.
International markets continued their weak performance last month as the developed international index lost 3.33% in February and has lost over 15% in the past 12 months. The emerging market index lost another 0.82% in February and has lost nearly 24% in the past 12 months.
Small cap stocks indexes continued their underperformance relative to large caps again in February. The small cap index decreased 0.22% in February and is down nearly 15% in the past 12 months. This trend should be expected to continue as small caps are considered more risky than large cap stocks in a downward trending market.
The US stock market is in the very late stages of a long bull market, technical research is showing that a bear market is eminent and that it would be prudent for investors to remain in more defensive investments such as bonds and consumer staples.