Markets continued to rebound off the February 11th low with oil and equities posting a third consecutive weekly gain as optimism seems to have replaced concern with regard to an economic slowdown. Since the S&P 500 was down 10% on the year through February 11th, it has rebounded and is now only down 2.1% on the year, with the most beaten up stocks (energy, materials, and industrials) very much leading the way. Emerging markets have bounced over 15% from their mid-February lows as well, with Brazil rallying 22% in the past 15 days on news of more corruption crackdowns including the arrest of former President Luiz Inacio Lula da Silva.
Encouraging economic reports, stabilization in the price of oil, and anticipation of upcoming central bank policies are seemingly supporting factors. Additionally, equity markets had fallen to more attractive valuation levels in the downdraft. The S&P 500 P/E multiple has since moved back up over 17.5x, leaving additional multiple expansion a less likely tailwind to equity markets going forward.
An encouraging February jobs report showed robust hiring by employers but weak wage growth which may serve to keep Fed rate hikes at bay. The ISM Manufacturing report came in better than expected (49.5 vs 48.5), bucking a trend of three straight months of downside misses, but registered a fifth consecutive monthly reading below 50, the longest such streak since July 2009. The composite ISM (services and manufacturing) came in at 52.9, still solidly in expansionary territory. Oil rallied sharply, up 9.6% on the week and 37% off last month’s lows, as the Baker Hughes rig count fell to 489, just one rig more than the 488 record low set in 1999, with data stretching back to 1948! Continued discussion of OPEC and non-OPEC production freezes also provided a stabilizing force for oil prices.
Central bank maneuvers and the earnings recession in the U.S. remain a concern. Year over year fourth quarter S&P 500 earnings fell for a third consecutive quarter by 3.4% and are projected to fall another 8% in the first quarter of 2016. Rarely have markets experienced an earnings recession of this sort in the absence of an economic contraction. Meanwhile, upcoming central bank meetings carry expectations of either dovish support (ECB 3/10) or no action (Fed 3/16 and BOJ 3/15), leaving an overall stimulus monetary tone on the markets.
