Market Perspective for March 27, 2015

Equities slipped this week as leading sectors saw a quick sell-off. The drop landed squarely on the Nasdaq, which fell more than 3 percent. The other major indexes are down a little over 2 percent. The Dow Jones Transportation Average slumped 5 percent after railroad Kansas Southern (KSU) said the drop in oil prices will impact revenues. From a sector perspective, biotechnology, pharmaceuticals and semiconductors and lost the most ground. However, biotechnology and pharmaceuticals both experienced a modest rally today.

Coming into this week, biotechnology was up more than 20 percent. Following this week’s drop, biotechnology is still up double digits, while the S&P 500 Index will need to rally on Friday to stay positive for the year. It would not be surprising to see a further drop in biotechnology given the run-up, but the sector did bounce off its 50-day moving average, as it did twice before in the past four months. Additionally, small- and mid-cap stocks continue to lead the market. As long as small-caps are doing well, a deeper correction appears unlikely.

Oil prices rallied sharply after Saudi Arabia launched air strikes on Yemen in an effort to defeat Iranian supported forces. Yemen is not a key oil producer, but it shares a long border with Saudi Arabia, whereby creating an unstable situation. Yemen’s president has fled the country and there are now four ground armies operating in the country: Yemeni government forces still control most of the east, Iranian-backed Houthis control the West, Al-Qaeda forces which control parts of the north and south, and the politically motivated Southern Movement that controls two smaller areas.

Geopolitical factors often impact the energy market, but are typically short lived. Oil prices are already coming down on Friday as fundamentals again take precedence. Inventory continues to rise around the world and unless fundamental demand increases or supply drops, oil prices will remain depressed.

Domestically, the final estimate of fourth quarter GDP growth was revealed to be 2.2 percent, unchanged from the second estimate. There were some changes, with inventories moving from positive to negative and personal consumption climbing from 4.2 percent growth to 4.4 percent. The impact of the Affordable Care Act can be seen in those consumption numbers and helps explain why retail sales have been weaker than anticipated. Lower gas prices were expected to translate into stronger retail sales, but it turns out consumers are spending more on healthcare premiums. This also helps explain why biotechnology and pharmaceuticals have performed strongly this year.

Markit released the flash PMI for March this week. It ticked up slightly from February’s level, with new orders and job creation rising.  Manufacturing is a leading indicator for the economy and its strength in March points to higher economic growth over the next quarter. New homes sales were also up strongly in February and well above estimates as forecasters had expected the weather to weigh on sales. Inflation was also positive in February, up 0.2 percent. Real time data shows inflation is still increasing in March, which also suggests the economy is heating up as we close out the quarter.

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