Eight Years and Counting
This week, investors recognized the 8-year anniversary of a bull market that is now second only in length to the tech-fueled run of the 1990s. In March, blue chip stocks have consolidated a small portion of recent gains, but nevertheless, the S&P 500 has now returned over 250 percent since the bear market lows in March of 2009. The tech boom twenty years ago was marked by productivity enhancing technology investment that boosted economic growth to rates domestically that routinely exceeded 3 percent. In contrast, economic growth this cycle has been disappointingly slow, with weak aggregate demand growth supported by easy money policy that the Fed is now in the early stages of unwinding.
Un Fait Accompli
If any doubt existed about the outcome of next week’s central bank meeting, today’s strong jobs report all but assures financial markets that this year’s first rate hike, and the third of this cycle, is on its way. Following upwardly revised job gains reported in January, the government this morning reported better than expected net job creation totaling 235,000 in February. Accompanied by an unemployment rate that is now well below the 5 percent mark, today’s report leaves Yellen & Co. observing a near full employment economy in which headline inflation now exceeds the Fed’s 2 percent goal. In addition to next week’s anticipated rate hike, we expect the Fed to continue tightening the money supply in months to come.
Grains, precious metals, copper, oil... name your commodity, they all fell this week. Commodity price declines follow budding optimism by hedge funds that recently reported record long positions in one of the most important – oil. Although OPEC’s actions to cut production promise to shrink excess global inventories, investors are tired of waiting for the evidence to materialize. Once again, the Department of Energy reported weekly U.S. oil inventories that increased beyond the small build that investors were expecting, helping catalyze a rush for the exits by hedge funds over-extended to the upside. Oil prices promptly fell back below $50 as traders’ sanguine view of the market turned sour. Sentiment was also negatively impacted by OPEC and industry commentary from an oil confab in Houston that cast doubt on the duration of OPEC supply cuts amid concerns of a rebound in U.S. production that could foil OPEC’s efforts to manage supply.
Looking past this week’s pullback in oil, refineries in the northern hemisphere are about to return from seasonal maintenance ahead of the summer driving season, foretelling higher demand for crude at the same time that reduced OPEC loadings should begin to show up in fewer imported barrels. Against this backdrop, we foresee petroleum inventory reductions. Regarding the rising rig count and anticipated U.S. production increase, we would observe that some of the gains in the Permian Basin will be offset by relatively stagnant-to-declining output in other oil producing basins like the Williston (North Dakota Bakken), where increasingly mature acreage and transportation differentials render new investment more difficult at present prices. More broadly, U.S. production of nine million barrels/day accounts for just 9 percent of global demand. Outside of OPEC and the U.S., the remaining 58 percent of global supply necessary to meet demand must come from regions and countries where the production outlook has been muted by low prices and a lack of investment. Thus, we remain bullish on the supply and demand fundamentals of oil, underwriting our continued overweight of the energy sector.
Our Takeaways from the Week
- Stocks remain well bid ahead of an imminent Fed rate hike next week
- Commodity prices retrenched, but the pullback in oil appears technical in nature