Economic and Investment News Bits
- Are we out of the woods, yet? After a tough January and half of February, stock markets have rebounded in the last month, with the Dow and S&P 500 both gaining more than 8%, while smaller stocks gained more than 10%. Developed international stocks jumped 11%, and emerging market stocks saw gains of more than 13%. The Wall of Worry is still out there, and the election will certainly have an impact on the markets. But for now at least, stock markets are hooking their wagons to the gains in oil prices (see our Graph of the Week on page 2).
- “On a global scale, oil production is finally dropping – and that’s constructive for prices.” The International Energy Agency (IEA) writes that “prices may have bottomed out, citing a February decline in both OPEC and non-OPEC output and hopes for continued U.S. dollar weakness.” Traditionally, oil prices have risen between March and the beginning of the busy summer travel season.
- Tomorrow, March 16, is the quarterly Federal Reserve meeting, which includes forecasts of key economic variables and the path for future Fed Funds rates. As economist Jeremy Siegel says, “To predict that there will not be any change in current policy rate is a slam dunk.”
- “With normalized relations between the U.S. and Cuba being restored, more Americans view Cuba favorably than unfavorably. This suggests that Americans increasingly see Cuba as a potential place to visit and as a business location. This is what U.S. airlines are hoping to capitalize on. The reestablishment of scheduled airline service (up to 120 commercial flights a day) is the first step,” (Source: U.S. Global Investors).
- China’s government announced last week its economic growth target of 6.5% to 7% for 2016. This would match the country’s growth in 2015. The U.S. economy has grown by 6.5% or more in just one year in the last 49 years. In 1984, GDP gained 7.3%. (Source: Department of Labor)
- In what could be the ultimate cocktail combination, Italy’s Gruppo Campari said it wants to buy France’s maker of Gran Marnier. Campari says it wants to “take advantage of the revival of classic cocktails, especially in the U.S.”
Thought for the week
“Do something wonderful. People may imitate it.”
Albert Schweitzer, German theologian (1875-1965)
Wonder How the Government Finances its Spending?
The U.S. government issues bonds to fund spending in excess of what it receives in taxes and other income sources. Ten years ago, the yield on the 10-year Treasury note was 4.76%. As of last Friday (March 11), the yield on the 10-year Treasury note was at 1.98%. Thus, for the same annual cost of money, our government can borrow more than 140% more money today than we did ten years ago, and borrow it does. This should help to explain why the Federal Reserve held short-term interest rates near 0% for so long, only recently moved Fed Funds rates to 0.25%, and why it will go very, very slowly in further rate increases. Every bit of higher rates costs the government billions in interest payments. While there may be pressure on the Fed to raise rates in terms of jobs and inflation, no one believes there will be any significant increase in the near future.
Chart For March (CLICK TO ENLARGE)
Oil, oil oil! We have seen this black gold plummet from the record high of $145 per barrel in 2008 to as low as $28.74 in early February. This chart from Goldman Sachs shows that over the last 10 years the S&P 500 (large cap stocks) and the Russell 2000 (small cap stocks) have had very low correlation to oil. In other words, the change in oil prices has not impacted stocks. Fast forward to the last 12 months, and the correlation between oil and stocks has skyrocketed. It’s correlation to the S&P 500 rose to almost 0.6 and Russell 2000 to almost 0.9. This meant that stock prices were tracking oil very closely over the past year. Many would expect this high correlation to return to more normal levels going forward and for markets to trade more on fundamentals instead of oil.
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