Market Perspective for March 21, 2016

Domestic equities are aiming for a sixth consecutive week of gains in a holiday shortened-week; U.S. markets will close for Good Friday, and some European markets will be closed Thursday and Friday.

The market rallied last week following the Federal Reserve’s policy statement, which pointed to fewer rate hikes in 2016. The central bank now plans a maximum of two hikes this year rather than the four it forecast at the end of 2015. The Federal Open Market Committee (FOMC) also lowered its inflation target for the year. Both the Dow Jones Industrial Average and the S&P 500 Index are up for the year coming into this week. With the fear of a recession diminishing, investors continue to add equities exposure. Broad-based dividend funds, such as Vanguard Dividend Appreciation (VIG) are trading near or beyond all-time highs due to strength in utilities and consumer staples. The Nasdaq and Russell 2000 still have a bit more ground to cover as growth stocks catch up.

Existing home sales data for February will be released on Monday. Analysts anticipate a slight drop to 5.30 million homes sold from January’s 5.47 million units. On Wednesday, February new home sales are expected to climb to 523,000, up about 30,000 from January. Durable goods orders, the Kansas City Fed Survey of Manufacturing Activity and weekly initial unemployment claims are scheduled to report on Thursday.  Analysts project a 2.7-percent drop in February’s durable goods orders and a 0.5-percent drop in core capital equipment orders. Weekly initial unemployment claims are projected to rise slightly from the prior week. Although the market will be closed on Friday, the government will report the third and final estimate of fourth quarter GDP, which is expected to illustrate 1.0 percent growth.  Flash PMI reports for various countries, including the United States and EU nations will be released this week as well.

Earnings will be light this week, but a few releases to watch include Petrobras (PBR), ExOne (XONE), Nike (NKE), Red Hat (RHT) and GameStop (GME). Despite rising oil prices, Brazilian energy giant Petrobras is expected to report a net loss of $0.06 per share Monday based on revenues of $25.47 billion. Investors will be paying close attention to the company’s production levels. PBR is a key holding in many Latin America and Brazil funds. 3D printing company ExOne (XONE) is expected to report a loss of $0.15 per share on revenues of $14.71 million. On Tuesday, Nike (NKE) is expected to report EPS of $0.49 and revenues of $8.20 billion. Nike is a Dow component and a major holding in consumer discretionary funds. Cloud technology company Red Hat (RHT) will also release fourth-quarter earnings on Tuesday. Analysts are calling for EPS of $0.47 and revenues of $537.20 million. GameStop (GME) is expected to report EPS of $2.25 and revenues of $3.56 billion based on improving sales.

Beyond the equity rally, this week’s focus will be on the strength of the U.S. dollar and oil prices. The weaker dollar has enabled the price of West Texas Intermediate Crude (WTI) to top more than $39 per barrel, turning the energy sector from a burden to a blessing for the broader stock market, at least temporarily. Other commodities have benefited from the weak dollar as well. Reports of rising U.S. oil production will provide a test for the market this week. Many commodities are “overbought,” a technical signal that indicates a pullback is likely, though not guaranteed.

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