Five consecutive weeks of exchange gains ended Thursday March 24th. Stock gains have been largely attributed to rebounding oil prices.
While the American economy has continued to grow and the aggregate value of commodities has increased the international oil market has decreased and the falling price of oil has continued to pull the global market down, slowing the aggregate global economy.
The S&P 500 dropped 0.1% and reported that oil posted a 4.1% drop last week to $39.46 per barrel (WSJ, gains). While prices have risen, U.S. crude rose to $40 per barrel the week earlier from a $26 per barrel low in February. The Dow Jones Industrial average maintained a slight 0.5% gain in the same week. DJIA and NASDAQ both reported 0.1% gains Thursday (WSJ, gains).
The performance of the exchanges is one of the primary motivating factors that is influencing Federal Reserve officials, economists, and analysts to continue implementing interest rate increases. The gains are getting optimistic comments from FED officials that the next interest rate might be sooner than many expected; according to Federal Reserve Bank of St. Louis President James Bullard (WSJ, gains). The U.S. has been in a bull market for the past five years. Since 2009, when the markets crashed, every U.S. exchange has increased at least 100%. The New York Stock Exchange (NYSE) has increased 151%, the NASDAQ Composite Index is up 242%, and the Russel 2000 small stock index is up 251% (WSJ, market).
The FED’s April policy meeting is the next expected opportunity for a rate increase. It is possible, but not likely, that officials could approve a rate increase in April. Most economists are expecting a December increase. With oil prices rising it is very likely that we will have at least one more fed funds rate increase in 2016.
Two primary factors the FED is watching are oil and consumer expectations. The Organization of the Petroleum Exporting Countries (OPEC) is meeting on April 17th in Doha, Qatar to negotiate international oil production reduction agreements focusing on key countries including Iran and Russia (WSJ, OPEC). Countries must reach an agreement on oil production for each country. The increased supply from U.S. drilling and fracking, Iran entering the market after trade sanctions being lifted, and other nations beginning or increasing production was leading to surplus reserves and prices below profit and sustainability. The issue is that no country or company wants make excess reductions in production, especially as some countries are more dependent on oil production as the primary industry fueling their Gross Domestic Product (GDP).
While oil is a key concern, consumer expectations are always a primary focus in monetary policy. The economy is growing but inflation is still below 2% meaning slight changes in expectations can affect the effects of monetary policy. In January, while consumer confidence remained strong the FED was concerned with job growth slowing after the rate increase and inflation dropping slightly below 2% after the announcement of the increase in December. The delay in the next increase might have more impact on expectations than demand but this should be mitigated by uncertainties being addressed at the OPEC meeting in April.
Growth in the markets will continue despite this break in consecutive gains. The issues are how the FED will implement monetary policy that will not disrupt the market and reach the FED’s inflation, job growth, and international goals. Second, how to manage the strength of the dollar in the global market. Third, our influence in recovery on a global market where many nations are implementing negative interest rates and reducing oil production to accommodate increased global supply.