The S&P 500 (Large-Caps), S&P 400 (Mid-Caps), and Russell 2000 (Small-Caps) all set new highs last week, but the path forward is still littered with woes…
Highs
Oil has continued to pull itself up off the mat, reaching into the $60 range by weeks end. Improving oil prices can lead to concerns easing regarding deflation across the globe. Most estimations do not have oil prices increasing dramatically through the remainder of the year, nor do they have prices declining drastically. Optimism over oil has allowed market attention to revert to earnings. More than 70% of S&P 500 companies reporting, have beat earnings estimations. Importantly, companies beating revenue expectations remain above long term averages.
Europe showed signs of life, adding to the positive sentiment across the market last week. German trade balances improved to $21.8B in December and GDP for the 4th quarter was 0.7% and 1.6% for 2014[2]. Not the be-all, end-all, but a good sign that stimulus put into place during the 4th quarter had a positive impact on the European economy. Given the extent of stimulus put into place a few weeks ago, we should be seeing steady improvement in the European markets.
The jobs information reported during the week also showed optimism. The job openings and labor turnover survey (JOLTS) reported in over 5 million available jobs at the end of the year. The highest level since 2001[3]. This along with the increased participation rate are good signs of a strengthening employment market.
Woes
A strengthening employment market usually raises concerns over a tightening Federal Reserve (FRB) policy. The thing to remember is that the FRB has a dual mandate:
- Full Employment
- Inflation of 2%
While employment, purely from a percentage stand point is in the range of full employment, under employment is elevated; keeping earnings and hours down. Also, the participation rate has changed greatly. The participation rate increases as workers become more optimistic regarding the employment environment, all other things equal, this causes the unemployment rate to increase.
While optimism was clear in Europe, they still have issues to contend with. The standoff between Russia and Ukraine saw a cease-fire on the 15th, brokered in part by Germany and France. The tensions in Ukraine renewed several weeks ago and have kept the European markets on edge.
Also keeping Europe on edge is the on-going negotiations between the EU and Greece. They must come to terms on the bail-out program Greece received years ago, by month end. From day to day, Impasses in the negotiation process seem to appear and disappear. Expect this to be a topic for the majority of February.
China’s inflation rate has suffered greatly through the fall of oil. Last week we discussed the lowered reserves put into place by the Peoples Bank of China. That should help stimulate lending and spending, which will help the long-term health of inflation in the region.
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[1] “Seesaw1902” by Chicago Daily News – http://memory.loc.gov/ammem/ndlpcoop/ichihtml/cdnhome.html. Licensed under Public Domain via Wikimedia Commons – https://commons.wikimedia.org/wiki/File:Seesaw1902.jpg#mediaviewer/File:Seesaw1902.jpg
[2] www.investing.com – economic calendar
[3] www.mfs.com – week in review