It was another volatile week in the markets and despite a rally on Friday, U.S. Stocks ended the week slightly lower.  Foreign markets performed worse as Japan saw its worst week since the financial crisis with stocks down 11%.  U.S. Treasury yields fell leaving the 10 year yielding about 1.7%.  Commodities were mixed as oil prices ended the week lower and precious metals prices rose.  The dollar fell as expectations of further fed rate increases this year declined.  Janet Yellen testified before Congress and expressed concern over global weakness.  Yellen indicated that it is too soon to rule out a rate increase for March but also that the FED needs to be prepared for the possibility of negative interest rates.  Such bifurcated comments only added confusion to the markets.

The rally on Friday was fueled by speculation of the possibility of an OPEC production cut after several OPEC members called for one.  The UAE in particular had been opposed to this previously but now are discussing the possibility.  Over the weekend Russia and several OPEC members including Saudi Arabia agreed not to raise production if Iran and Iraq also agree not to raise production.  Before we break out the drilling rigs or the champagne, based on history, I would  put the odds of any reduction in production about 25%.  Even if there is an agreement, individual OPEC members will likely cheat and produce somewhat above whatever the target is.  For such a cut to succeed it would require the full backing of Saudi Arabia acting as the swing producer and making substantial cuts to support oil prices.

The other piece of good news fueling the rally on Friday was an increase in Consumer spending.  I’ve long held that consumer spending is what is going to drive the U.S. economy in the face of weak energy and weak exports.  Since consumer spending is about 2/3 of economic activity, the increase in consumer spending is important.

However, stocks still face the headwind of falling earnings.  According to Factset with 76% of S&P 500 companies reporting earnings, those companies’ earnings have fallen by 3.7%.  If this trend continues, this will be the third consecutive quarter of declining earnings.

In particular this week:

• The Treasury department reported the U.S. government deficit in the prior 12 months fell to $405 Billion or 2.2% of gross domestic product.  The deficit is expected to rise in 2016 due to spending above the sequester for defense and roads.  A year ago the deficit in the prior 12 months was $495 Billion or 2.8% of GDP.
• The National Association of Realtors reported that the median existing home price rose nearly 7% in 2015.
• The U.S. Energy Information Administration showed a decline of 754,000 barrels in crude oil inventory in the prior week.
• The Labor Department reported that first time claims for unemployment fell 16,000 in the prior week to 269,000 much better than expectations.   The four-week moving average of claims rose to 281,250.
• The Commerce Department reported that retail sales rose 0.2% in January and December’s retail sales were also revised from 0% growth to 0.2% growth.  The severe snowstorm in the northeast failed to drive January retail sales to the negative.  Retail sales have now grown for four consecutive months.

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Best Regards,

Loren C. Rex, CFP^®, AIF^®                                                                                Erik Smith

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These are the opinions of Loren Rex and Erik Smith and are not necessarily those of Cambridge, are for informational purposes only, and should not be construed or acted upon as individualized investment advice.