Oil prices firming up as supply levels are reduced for a good week for oil

Markets rose this week on the prospects for tax reform and rising oil prices. Small cap stocks, which have lagged year-to-date, led the gains; the outperformance of these more aggressive stocks suggests that investor confidence is regaining momentum. Meanwhile, the S&P 500® Index, which is dominated by large companies, ended the quarter with its best performance since the fourth quarter of 2015. Apparently, market sentiment has quickly moved past last week’s failed effort at health care reform in favor of optimism for comprehensive tax reform; here, Republicans are under pressure to deliver a legislative victory. Also, in order to gain bipartisan support, a large infrastructure spending program may be included in the tax bill. Together, these initiatives have refocused investors on President Trump’s pro-growth agenda. Oil prices also gained this week; several OPEC members commented about possibly extending the production freeze agreement when the group meets in May. Also, plans by Saudi Arabia’s state-owned oil company Saudi Aramco to publicly list its shares are likely contributing to these discussions; early this week, the Kingdom announced a tax cut from 85% to 50% for oil producers in a move to better position the company for a higher price from investors. The Saudi IPO (which will represent an approximate 5% ownership stake) may also be followed by similar filings from other national oil companies, as oil states look to address budget shortfalls and open their companies to foreign capital and expertise.

As expected, the U.K. triggered Article 50 of the Treaty on European Union to formally initiate the two-year process of withdrawal from the EU. British Prime Minister Theresa May sounded a cooperative tone in pointing to areas of mutual economic and security interests which would remain intact despite the separation. EU officials, while remaining committed to protecting the bloc’s interests, similarly promised to take a fair and constructive approach to the deliberations. Complicating matters, though, are the upcoming European elections, notably in France and the Netherlands, which are increasingly seen as referendums on EU membership. Thus, negotiations between the U.K. and EU will likely be protracted and weigh on the region over the medium-term. And, market volatility may increase over the ensuing months as developments across the European continent unfold.

This week’s rally to end the month should be a positive signal heading into the second quarter. Looking ahead, investor focus will likely shift away from the legislative agenda to the upcoming corporate earnings calendar. Key areas of interest will include management plans for capital spending and business expansion, and the degree to which the market’s optimism is evident in the real economy.

Source: Pacific Global Investment Management Company

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Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

  • Growth in the gross domestic product slowed over the final three months of 2016. The third and final estimate of the fourth-quarter GDP revealed an annual growth rate of 2.1%. In the third quarter of 2016, the GDP increased at an annual rate of 3.5%. With the third estimate for the fourth quarter, the general picture of economic growth remains largely the same; consumer spending, as measured by personal consumption expenditures (PCE) increased 3.5%. The deceleration in the fourth-quarter GDP reflected downturns in exports, in federal government spending, and in nonresidential (business) fixed investment. For the year, the GDP increased 1.6% in 2016 compared to an increase of 2.6% in 2015. Gross domestic income gained 1.0% in the fourth quarter, compared with a 5.0% increase in the third quarter. Corporate profits from current production increased $11.2 billion in the fourth quarter of 2016, compared with an increase of $117.8 billion in the third quarter.
     
  • Personal income rose in February, while consumer spending increased only marginally. According to the report from the Bureau of Economic Analysis for February, personal income (pre-tax) increased 0.4% and disposable personal income (after-tax) climbed 0.3%. Personal consumption expenditures increased only 0.1% for the month. However, year-over-year PCE have risen 2.1%, reaching the Fed's 2.0% inflation target for the first time in almost five years. Core expenditures, which exclude food and energy, increased 0.2% in February and have climbed 1.8% over the 12 months ended in February 2017.
     
  • The international trade-in-goods deficit dropped 5.9% in February from January. The deficit was $64.8 billion in February, down $4.1 billion from $68.8 billion in January. Exports of goods for February were $126.8 billion, $0.1 billion less than January exports. Imports of goods for February fell 2.1% to $191.6 billion. The trade-in-goods deficit this February is almost identical to the deficit in February 2016.
     
  • The Conference Board Consumer Confidence Index®, which had increased in February, improved sharply in March, reaching its highest level since December 2000. The index now stands at 125.6, up from 116.1 in February. Consumers saw improved economic conditions and growth in business, jobs, and personal income. According to the latest Surveys of Consumers from the University of Michigan, higher income, more job opportunities, and low inflation are the main reasons consumer sentiment remains optimistic. For March, the Index of Consumer Sentiment increased 0.6% to 96.9% and is up 6.5% over the last 12 months.
     
  • In the week ended March 25, the advance figure for seasonally adjusted initial unemployment insurance claims was 258,000, a decrease of 3,000 from the previous week's unrevised level of 261,000. The advance seasonally adjusted insured unemployment rate ticked up 0.1 percentage point to 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended March 18 was 2,052,000, an increase of 65,000 from the prior week's revised level. The four-week moving average was 2,030,750, a decrease of 1,250 from the prior week's revised average. This is the lowest level for this average since June 24, 2000, when it was 2,028,250.

 

Eye on the Week Ahead

Stocks have been more volatile over the past few weeks. However, a strong report on the employment situation released later this week could go a long way in easing investors' concerns about diving back into the market.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Healthcare Redo on pause….Moving on to tax reform

The markets declined last week as the focus on health care reform weighed on investor sentiment.  Many had viewed the administration’s early efforts on the American Health Care Act, the replacement for Obama’s Affordable Care Act, as potentially delaying pro-growth initiatives, most importantly tax reform and an infrastructure package.  The White House’s push for a Friday vote in the House of Representatives set the stage for a transition to other, more popular, items on the President’s agenda.  Ultimately, though, the bill was pulled from consideration due to a lack of votes.  Still, the President’s determination to move forward with growth-oriented policies is a positive signal for stocks and the economy.  Investors had begun voicing concerns that further delays would undermine the post-election market rally; now, a renewed impetus for these important initiatives may well support business and investor confidence, and help recapture market momentum.  Elsewhere, British Prime Minister Theresa May confirmed plans to invoke Article 50 on March 29th; the move to initiate the process of exiting the European Union will lead to vigorous debate across Europe.  Certainly, the future of the EU will play out over the course of critical elections in France, Germany, and the Netherlands.

Interest rates, meanwhile, declined due to the uncertainty over health care reform as well as a reduced outlook for inflation as oil prices declined.  West Texas Intermediate crude, the North American benchmark, fell below $50 per barrel on March 8th as inventory levels and drilling rig activity increased.  The Energy Information Administration’s (EIA) Petroleum Status Report showed that crude oil in storage grew by 5 million barrels this week, significantly outpacing analysts’ estimates of a 2.8 million barrel increase.  The EIA, though, noted that overall inventories remain within the expected range for this time of year; storage levels typically increase prior to the peak summer driving season as refiners undergo maintenance during the spring.  At the same time, the recent rise in rig counts may overstate prospective production increases.  The sharp increase in the number of drilled but uncompleted wells suggests that rig activity may not necessarily correspond with higher output; rather, producers are likely preparing wells for activation once oil prices sustain a level sufficient for acceptable economic returns.  Our conversations with oil company executives suggest that oil prices closer to $60 per barrel would be necessary for substantial production growth.

Companies have entered a quiet period ahead of the first quarter earnings season which begins on Tuesday, April 4th.  The market’s focus over the near-to-medium-term will likely include the legislative process in Washington as Congress addresses corporate tax reform, the upcoming earnings releases, and overseas developments related to Brexit and the European elections.

Source:  Pacific Global Investment Management Company

market close

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

  • At first blush, it appears that orders for manufactured durable goods have been strong in both January and February. However, a closer look at the latest Census Bureau report reveals that durable goods orders for core products have been slow. Overall, orders for durable goods increased 1.7% in February following a revised January increase of 2.3%. Much of the gain the past two months has been attributable to transportation, particularly aircraft sales. New orders for durable goods orders excluding transportation increased only 0.4% in February. New orders for core capital goods, which exclude defense and aircraft, actually decreased 0.1% for the month, which is indicative of continued weakness in business investment.
     
  • A dwindling supply of affordable housing has stunted the sales pace of existing homes in February. Total existing homes sales (including single-family homes, townhomes, condominiums, and co-ops) fell 3.7% to an annual rate of 5.48 million in February, down from 5.69 million in January. Despite the drop-off, February's sales pace is still 5.4% above a year ago. Total housing inventory at the end of February increased 4.2% to 1.75 million existing homes available for sale, which is 6.4% lower than a year ago (1.87 million) and has fallen year-over-year for 21 straight months. Unsold inventory is at a 3.8-month supply at the current sales pace (3.5 months in January). The median existing-home price for all housing types in February was $228,400, up 7.7% from February 2016 ($212,100). February's price increase was the fastest since last January (8.1%) and marks the 60th consecutive month of year-over-year gains.
     
  • Unlike existing home sales, new home sales surged in February. Sales of new single-family houses in February were at a seasonally adjusted annual rate of 592,000, which is 6.1% higher than the January sales rate of 558,000. New home sales are 12.8% above the February 2016 estimate. The median sales price of new houses sold in February was $296,200, down about 4.0% from January's median sales price of $308,200. The average sales price was $390,400, which is almost 10.0% higher than January's average sales price of $355,300. The seasonally adjusted estimate of new houses for sale at the end of February was 266,000. This represents a supply of 5.4 months at the current sales rate, which is down from January's supply of 5.6 months.
     
  • In the week ended March 18, the advance figure for seasonally adjusted initial unemployment insurance claims was 258,000, an increase of 15,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate dipped to 1.4%. The advance number for seasonally adjusted insured unemployment during the week ended March 11 was 2,000,000, a decrease of 39,000 from the prior week's revised level.

 

Eye on the Week Ahead

The final report on the fourth-quarter GDP is released this week. The prior reading showed the rate of economic growth to be 1.9%. This week's final returns are expected to show little change.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

Fed confirms economic strength as the markets shift focus to Fiscal Policy and Trumps pro-growth agenda

Stocks rose this week following the Federal Reserve announcement on Wednesday to increase interest rates for a second time in three months.  Fed Chair Janet Yellen, in communicating the rate decision, noted: “We have confidence in the robustness of the economy and its resilience to shocks”; and, “Many more people feel optimistic about their prospects in the labor market.”  The favorable assessment buoyed investor sentiment, especially for shares of small and mid-sized companies which outpaced large cap stocks.  At the same time, Treasury yields declined as the Fed remained committed to a “gradual” pace of future rate hikes; the “dot plot,” which captures the Fed’s interest rate outlook, was largely unchanged from the December meeting.  Broadly positive economic data further bolstered investor confidence; robust housing starts, in particular, signal accelerating strength in the economy and bode well for the construction, transportation, and building materials industries.  Meanwhile, measures of consumer confidence are near post-recession highs; as a sign that consumers are responding to the improved economic outlook, retail sales rose for a sixth consecutive month.

Since the financial crisis, the Fed has been the primary driver of market action.  Yet, this week’s monetary policy meeting was notably uneventful.  Even as Fed officials raised rates for only the third time in a decade, the market’s response was remarkably subdued; indeed, this week, in sharp contrast to the market’s anxiety over the December 2015 rate hike, stocks rose and bonds fell.  Why the seeming disregard for the central bank?  Investors have apparently shifted focus from monetary policy to fiscal policy, that is, to Congress and the new administration’s pro-growth agenda.  These developments will likely dominate market action in 2017; healthcare, tax reform, regulations, infrastructure spending, trade, and immigration all present investment opportunities, as well as risks.  Certainly, with so many items on President Trump’s agenda, the main question is the extent to which the administration will be able to deliver on its many promises.  Nevertheless, the return to a market environment in which momentum will be determined mainly by developments in the real economy, rather than monetary policy, is yet another milestone in the economy’s long road to recovery since the Great Recession.

Over the last few weeks, growth-oriented stocks in areas such as transportation, industrials and energy, have sold off.  The recent action is most likely a pause after the significant post-election rally.  The Fed’s decision to increase interest rates, and the market’s reaction to that decision, provides confirmation of the economy’s strength.  Despite short-term negative movements in the markets, this positive outlook should provide a boost to these sectors over time irrespective of other benefits which may result from legislative action.

Source:  Pacific Global Investment Management Company

Chart reflects price changes, not total return. Because it does not include dividends or splits, it should not be used to benchmark performance of specific investments.

 

Last Week's Headlines

  • Not unexpectedly, the FOMC raised the target range for the federal funds rate by 25 basis points to 0.75%-1.00%. The Committee judged that a modest increase in the federal funds rate is appropriate in light of the economy's solid progress toward the Committee's goals of maximum employment and price stability. The decision to increase interest rates reflects the Committee's view that waiting too long to scale back some accommodation could potentially require raising rates rapidly sometime down the road, which, in turn, could risk disrupting financial markets and push the economy into recession. Anticipating continued labor strengthening and inflation inching toward the Fed's longer-range target of 2.0%, two more rate increases are still in the offing over the remainder of 2017. Interestingly, in Chair Janet Yellen's prepared comments, she noted the Committee's economic projections as follows: the growth of the GDP is expected to be 2.1% this year and next and edge down to 1.9% in 2019; the unemployment rate would stand at 4.5% in the fourth quarter of this year and remain at that level over the next two years; and the median inflation projection remains at 1.9% this year, rising to 2.0% in 2018 and 2019.
     
  • In a sign of continuing inflationary pressure, consumer prices, retail sales, and producer prices each increased in February. Consumer prices edged up 0.1% in February, according to the latest report from the Bureau of Labor Statistics. Over the last 12 months, the CPI has risen 2.7%. The index was held down by declining energy prices (-1.0%), which partially offset increases in several indexes, including food, shelter, and recreation. The index less food and energy rose 0.2% in February, and has increased 2.2% for the 12 months ended February 2017. This was the fifteenth straight month the 12-month change remained in the range of 2.1% to 2.3%, which is in line with the Fed's longer-range target of 2.0% inflation.
     
  • Advance estimates of U.S. retail and food services sales for February 2017 were $474.0 billion, an increase of 0.1% from the previous month and 5.7% ahead of February 2016. Retail sales increased 0.1% from January, and are up 5.9% from last February. Gasoline stations sales were up 19.6% from February 2016, while nonstore (internet) retailers' sales jumped 13.0% over last year. Conversely, restaurant and bar sales fell 0.1% for the month.
     
  • Producer prices for goods and services increased 0.3% in February, following a 0.6% increase in January. The price index climbed 2.2% for the 12 months ended February 2017 — the largest advance since a 2.4% increase in the 12 months ended March 2012. Prices less foods, energy, and trade services rose 0.3% in February, the largest increase since a 0.3% advance in April 2016. For the 12 months ended in February, the index less foods, energy, and trade services climbed 1.8%.
     
  • New construction in the housing market picked up in February. Housing starts rose 3.0% for the month compared to January, and are 6.2% above the February 2016 rate. Single-family housing starts in February were 6.5% above the revised January figure. Housing completions also surged in February, climbing 5.4% above the revised January estimate and 8.7% ahead of the February 2016 pace. On the other hand, permits for new residential construction were off, down 6.2% in February from January but still 4.4% ahead of the February 2016 estimate.
     
  • The Job Openings and Labor Turnover Survey(JOLTS) offers information on monthly changes in the number of job openings, hires, and quits. The latest information for January reveals that there were 5.6 million job openings on the last day of January — about 87,000 more openings than December. There were 5.4 million hires in January, roughly 137,000 more than December. The number of total separations, including quits, layoffs, and discharges, (otherwise known as "turnover") increased by 174,000 in January compared with December. Over the 12 months ended in January, hires totaled 63.1 million and separations totaled 60.7 million, yielding a net employment gain of 2.4 million.
     
  • The Federal Reserve's index of industrial production shows how much factories, mines, and utilities are producing. Industrial production was unchanged in February following a 0.1% decrease in January. However on a positive note, manufacturing output moved up 0.5% for its sixth consecutive monthly increase. Manufacturing gains occurred in business equipment and auto production. Mining output jumped 2.7%, but the index for utilities fell 5.7%, as continued unseasonably warm weather further reduced demand for heating. Capacity utilization for the industrial sector declined 0.1 percentage point in February to 75.4%.
     
  • In the week ended March 11, the advance figure for seasonally adjusted initial unemployment insurance claims was 241,000, a decrease of 2,000 from the previous week's revised level. The advance seasonally adjusted insured unemployment rate remained at 1.5%. The advance number for seasonally adjusted insured unemployment during the week ended March 4 was 2,030,000, a decrease of 30,000 from the previous week's revised level.

 

Eye on the Week Ahead

This week should see equities markets settle following the Fed's decision last week to increase interest rates for the first time this year. February's figures on sales of existing and new homes are available this week. Orders for durable goods have been volatile at best. Not much change is expected in the manufacturing sector when February's numbers are released at the close of this week.

 


Fortem Financial 2016. All rights reserved. Data Sources: News items are based on reports from multiple commonly available international news sources (i.e. wire services) and are independently verified when necessary with secondary sources such as government agencies, corporate press releases, or trade organizations. Market Data: Based on reported data in WSJ Market Data Center (indexes); U.S. Treasury (Treasury Yields); U.S. Energy Information Administration/Bloomberg.com Market Data (oil spot price, WTI Cushing, OK); www.goldprice.org (spot gold/silver); Oanda/FX Street (currency exchange rates). All information is based on sources deemed reliable, but no warranty or guarantee is made as to its accuracy or completeness. Neither the information nor any opinion expressed herein constitutes a solicitation for the purchase or sale of any securities, and should not be relied on as financial advice. The opinions expressed are solely those of the author, and do not represent those of Fortem Financial, LLC or any of its affiliates. Past performance is no guarantee of future results. All investing involves risk, including the potential loss of principal, and there can be no guarantee that any investing strategy will be successful. Carefully consider investment objectives, risk factors and charges and expenses before investing.

The Dow Jones Industrial Average (DJIA) is a price-weighted index composed of 30 widely traded blue-chip U.S. common stocks. The S&P 500 is a market-cap weighted index composed of the common stocks of 500 leading companies in leading industries of the U.S. economy. The NASDAQ Composite Index is a market-value weighted index of all common stocks listed on the NASDAQ stock exchange. The Russell 2000 is a market-cap weighed index composed of 2,000 U.S. small-cap common stocks. The Global Dow is an equally weighted index of 150 widely traded blue-chip common stocks worldwide. Market indices listed are unmanaged and are not available for direct investment.

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