The major averages moved back over their 50-day moving averages on Monday — ignoring fresh lows in crude oil — on another batch of poor U.S. economic data. Moreover, as crude oil fell to fresh lows not seen since early 2009, energy stocks posted strong gains.
Yes, you read that right: Stocks jumped on signs the American economy has stalled. And the stocks that are most vulnerable to the ongoing decline in energy prices were running in the pack as if nothing were amiss. (Also helping were reports of possible new stimulus measures out of China.)
In the end, the Dow Jones Industrial Average gained 1.3%, the S&P 500 gained 1.4%, the Nasdaq Composite gained 1.2% and the Russell 2000 gained 0.6%.
Crude oil lost 2.1% — building on last week’s 9.6% decline — on oversupply concerns after the International Energy Agency said there were no signs of a letup in U.S. shale production and growing chatter that a deal with Iran on its nuclear program could open the door to a flood of a half-million barrels or more of Persian crude. Output could climb to a million barrels or more in a few months, according to Iran Oil Minister Bijan Zanganeh.
That was good news for Edge subscribers who saw their ProShares UltraShort Crude Oil (NYSEARCA:SCO) position gain another 5.6% to bring its total gain since recommended on March 9 to 26%.
The justification for the day’s rise is all about the Federal Reserve’s upcoming March 18 policy statement. It’s widely expected the Fed will drop its “patient” language in reference to when the first rate hike since 2006 will happen. If this phrase is dumped, it would clear the way for a rate hike as soon as June.
Thus, we’re in a situation where bad economic news is good for stocks since it promises to keep the Fed on hold.
Specifically, both February industrial production and March homebuilder confidence missed expectations. Factory output was basically flat last month after falling for three straight months. And homebuilder confidence revisited its July low, suggesting that both lumber futures and housing starts should continue to decline.
As a reminder, due to the dampening effect of the strong dollar (pinching export activity), weakness overseas, and severe winter weather, the Federal Reserve Bank of Atlanta’s real-time GDPNow estimate for Q1 GDP growth stands at just 0.6%.
This softness, combined with a recent rollover in inflation data, is raising hopes that Fed will remain “patient” on the timing of rate hikes. This line of thinking was corroborated by a slight pullback in the dollar (down 0.5%) and gains by long-term Treasury bonds (pushing down yields).
I think this will ultimately be proven to be a consequence of Wall Street’s ongoing addiction to the Fed’s monetary morphine — a sign that the cheap-money junkies are loath to admit interest rates are about to start being normalized. Consider the cavalcade of Fed speakers we’ve seen over the last few weeks dismissing recent weakness in the economy and inflation as being caused by temporary factors, focusing instead on the impressive gains underway in the job market.
Societe Generale chief U.S. economist Aneta Markowska expects a rate hike in June and another at the end of the year, pushing the Fed’s policy rate towards 0.75%. This is well ahead of where the markets are: The Fed fund futures market is pricing in a single rate hike at the end of the year.
This was always a little too optimistic; whispers more recently have focused around the September meeting as being the most likely candidate for liftoff.
After June, in a nod to the Fed’s stated data-dependency and desire to avoid an adverse market shock, Markowska believes they are likely to hold off on any further rate hikes until inflation stabilizes, job growth continues, GDP growth bounces back, and the dollar’s rise remains relatively controlled.
But, as always when it comes to the Fed, we won’t know for sure until the policy announcement is made.
Technically, this market rebound looks fragile as a “Hindenburg Omen” was triggered by mediocre breadth measures — a warning sign that that has proved prescient recently after a cluster in September, December and January ahead of sizable market pullbacks.
Anthony Mirhaydari is founder of the Edge and Edge Pro investment advisory newsletters.
