S&P 500

S&P 500 Closed Up Slightly Despite Countless Charades of Rate Hike Talk From the Fed

Witawat (Ed) Wijaranakula, Ph.D.
Fri May 20, 2016

The S&P 500 closed at 2,052.32 on Friday, up 0.28% for the week as sector rotation continues. The best performing S&P 500 sectors for the week were Energy, Information Technology and Financials, which were up 1.51%, 1.42% and 1.41%, respectively. Financials was the worst performing sector last week. The worst performing sectors for the week were Utilities, Telecommunication services and Consumer staples, which were down 2.35%, 2.09% and 2.08%, respectively. Utilities and Consumer staples were the best performing sectors last week.

The S&P 500 surged 0.98% on Monday after Warren Buffett’s company, Berkshire Hathaway (NYSE:BRK.A), disclosed that the fund invested $1 billion in Apple (NASDAQ:AAPL) in the first-quarter 2016, and Pfizer Inc (NYSE:PFE) said they will pay $5.2 billion in a deal to acquire Anacor Pharmaceuticals Inc (NASDAQ:ANAC). Anacor is developing Crisaborole, a non-steroidal topical anti-inflammatory PDE-4 inhibitor, for the potential treatment of mild-to-moderate atopic dermatitis and psoriasis.

The index went downhill from there after a duo of Federal Reserve officials, Atlanta Fed President Dennis Lockhart and his San Francisco Fed colleague John Williams, said at an event hosted by Politico in Washington D.C. on Tuesday, that at least two interest rate increases may be warranted this year because the economy continues to expand and inflation is picking up. Mr. Lockhart added that the “Brexit” referendum in the U.K. wouldn’t prevent the Federal Reserve from taking action if policymakers deem it appropriate for the U.S. economy. The remarks sent the yield spread between the 10-year and 2-year U.S. Treasury Notes to close at 0.94 percentage points, a level not seen since late 2007. 

Both Fed officials have been doing a lot of talking since the U.S. dollar index plunged to a 15-month low on May 3, but Lockhart and Williams are not voting members of the Fed policy committee this year, meaning what they say has no impact on the Fed’s decisions. The release of the minutes on Wednesday from the Federal Reserve's April 26-27 policy meeting revealed that the U.S. central bank would likely raise interest rates in June, if supported by economic data.

New York Fed President William Dudley told reporters on Thursday that the Federal Reserve is moving closer to raising interest rates at one of its next two meetings and the fact this message is getting through to financial markets is welcome news. The S&P 500 plunged 1.06% to an intraday low after Dudley’s comment became published, but recovered from the loss during the late-session to close down just 0.37% on Thursday. The S&P 500 bounced 0.6% off the intra-week low, as traders covered their short positions ahead of the weekend's G7 Meeting in Sendei, Japan.

Since October 2015, the S&P 500 and WTI crude oil price are highly correlated with a coefficient of 0.9 over a 100-day period, where 1 is total positive correlation. The WTI crude oil spot price ran up another 3.08% for the week to close at $48.48 per barrel on Friday, following a research note from analysts Damien Courvalin and Jeffrey Currie at Goldman Sachs on Sunday. Goldman Sachs now expects WTIC to reach $45 a barrel in the second-quarter and $50 a barrel in the second-half of the year. The weekly crude oil inventory reports were mixed. 

The Energy Information Administration (EIA) weekly U.S. oil inventory report on Wednesday showed a build of 1.3 million barrels in the week ending May 13, compared to analysts’ expectations for a drawdown of 2.8 million barrels. The American Petroleum Institute (API) inventory data on Tuesday showed U.S. crude inventories declined by 1.1 million barrels.

The EIA also said the weekly U.S. crude oil production fell again for the sixteenth consecutive week, to 8.791 million barrels per day (bpd) for the week ending May 13, 2016, the lowest level since September 5, 2014, at 8.59 million bpd. Weekly U.S. crude oil output, however, has fallen 8.52% from the peak level of 9.61 million bpd during the week ending June 6, 2015. Houston-based oilfield services company Baker Hughes Inc. said on Friday that the U.S. oil rig count remains unchanged at 318, an 80.24% drop from the peak number of 1,609 in October 2014. 

More Fed talks are coming, as St. Louis Fed President James Bullard, a hawkish voting member of the FOMC, is scheduled to speak next week in Beijing and Singapore and Federal Reserve Chair Janet Yellen will speak at Harvard University on Friday, May 27. 

S&P 500 Summary: +0.41% YTD as of 05/20/16
Barclay Hedge Fund Index: +0.10% YTD 

Outperforming Sectors: Utilities +10.91% YTD, Energy +9.83% YTD, Telecommunication services +9.13% YTD, Materials +5.96% YTD, Consumer staples +2.93% YTD, and Industrials +2.82% YTD.

Underperforming Sectors: Consumer discretionary –0.71% YTD, Information technology –1.98% YTD, Financials –2.96% YTD, and Healthcare –3.55% YTD.

S&P 500 ANALYSIS

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