5. The U.S. Dollar
The year 2015 was when the strength of the U.S. dollar began to crush U.S. corporate profits. The dollar’s strength was so strong that it was one of the factors keeping the Fed from hiking rates. It made a near recession for big U.S. exporters. The U.S. Dollar Index, which is the dollar versus a basket of currencies, was at 80 in 2014 and went out at the end of 2015 at roughly 100, a rise of 25%. That is back to 95 as of March 17, giving back one-fourth of the gains.
The PowerShares DB US Dollar Bullish ETF (NYSEMKT: UUP) was at $26.10 at the start of December 2015 and was at $24.58, for a 5.8% drop from the high. For raw currencies, the euro was at $1.127 early on March 18, versus a recent low of $1.052. Despite QE efforts, the Japanese yen actually has strengthened. This means that U.S. exporters of goods and services are not out of the woods yet, but they aren’t covered in more ticks than they were last year.
6. U.S. and Global Stock Markets
If investors pulled a Rip Van Winkle from December 31, 2015 and woke up on March 18, 2016, they would have though nothing changed in the world. The DJIA and S&P 500 actually turned positive on March 17, and the gains of Friday, March 18, made for five straight weeks of stock market gains. For those of us who did not get a 10-week self-induced coma, it has been a harrowing year, in which the bull market turned into six or seven weeks of straight selling, and all rallies were sold into. Then in mid-February the tide reversed from an unexpected V-bottom.
The SPDR S&P 500 ETF (NYSEMKT: SPY) closed at $204.38 on March 18, now up 0.8% year to date after a dividend payment was made. The MSCI World Index, which is 85% of large and mid-cap equity performance in 23 developed markets countries (making up 85% of the market cap in each) is tracked by the iShares MSCI World (NYSEMKT: URTH) was down 12.6% in late January and was down only 0.5% at the close of March 17. One word of caution is valuations: the S&P 500 Index is now back to being valued at just over 17.5 times forward 12-month earnings per share (EPS).
S&P issued a few positive and mixed comments this week. Excluding the energy sector drag, the S&P 500 EPS growth would be +2.1% for the fourth quarter of 2015. Of the 494 S&P 500 companies that reported earnings, some 321 have beat expectations, 74 met and 99 missed. That equates to a 65% beat rate (two points under historic). Investors do need to not ignore that the S&P 500 is now trading just over 17.5 times its forward 12-month price-to-earnings (P/E) ratio, a premium to the 15-year average.
7. U.S. Treasury Bond Market Indicators
With the Federal Reserve lowering GDP growth expectations and lowering expected fed funds rate hike expectations, longer-dated Treasury yields for the 10-year and 30-year have gone to a more tepid trading. The 10-year Treasury note was around 1.88% on March 18, but was at 2.00% briefly before the Fed dial-down. Earlier in February, that yield was under 1.60%, versus 2.27% at the end of 2015. The 30-year Treasury long bond yield was 2.68% on March 18, versus 2.75% before the Fed dial-down. It was under 2.50% back on February 11 at the bottom, versus 3.02% at the end of 2015.
If we go to the shorter-date Treasury yields, the shortest rate is the overnight rate. Fed funds are still stuck at a target rate of 0.25% to 0.50%, and as noted elsewhere the CME fed funds futures are not even willing to commit to a full 0.75% rate until sometime in mid-2017. The five-year Treasury note, generally as far out as typical banks will invest, was at 1.34% on March 18. This yield was as high as 1.53% ahead of the Fed dial-down, but this was literally under 1.10% in mid-February and was 1.76% at the end of 2015.
8. Credit Spreads, Junk Debt
Credit spreads are how much more companies or other entities have to pay over the prevailing Treasury yields to borrow money. The speculative market, junk bonds, was approaching 50-50 odds of a recession in January of 2016. Even Jeffrey Gundlach of Doubleline Capital had indicated that there was a one-third chance of recession this year. The S&P U.S. Issued High Yield Corporate Bond Index was above 113 last summer and had briefly traded under 100 on February 11, 2016, and it was up to 108 again by March 17, 2016. The SPDR Barclays Capital High Yield Bond ETF (NYSEMKT: JNK) closed at $34.54 on March 18, which put it up right at 3% year to date, and up over 10% from its 2016 low of $31.27 on February 11.
S&P showed on March 18 that the speculative credit spreads had narrowed to 760 basis points on average. That is still a massive spread, and it is so wide due to so many troubled oil and commodity credits. Note that S&P was tracking that composite spread all the way up at almost 950 basis points in mid-February, versus 750 to 800 in the end of December of 2015 and start of 2016.