The Market: March 2016

US employment data continued strong while GDP growth is sluggish.

February saw another 200,000+ getting jobs. What frustrates so many market participants is that the economic data shows such a mixed bag.

Consistently strong employment data has come out despite recently weak manufacturing, service, and GDP data.

Auto sales have been robust as has loan growth yet railroads are seeing lower volumes across the board.

There does not seem to be consistency in the data which makes it hard to paint a picture of how the economy is actually doing.

It does seem inconsistent that GDP growth is so sluggish yet companies are willing to keep hiring people.  Something is going to have to give.  Either we will see GDP growth pick up as the year goes along or employment will weaken.

The markets are divided as well

The markets are divided as well.  Stocks built on the turnaround that began in late February which would seem to signal some optimism.

Having said that, money has been flowing into US Treasuries which are viewed to be safe-havens and the beneficiary of a weak economy.

We have seen oil prices stabilize and manage to actually move higher.  If oil can manage to claw its way to trade between $40 and $50 this year, it could create an ultimate “sweet spot.” At these levels, US companies can survive and muddle through which means that the fear of defaults and financial crisis will dissipate.

At these moderate oil prices, the consumer will still have relatively low gasoline prices.

Stocks and sentiment

Stocks don’t always take their cues from the economic data.  Sentiment plays an enormous role.  Before stocks began to move up in February, the sentiment was incredibly negative.  The “recession” word was being thrown around and the drop in the Chinese stock exchange reminded US investors of 2008.  The Bears were in control and they were piling on the shorts in anything energy or materials related.

Suddenly, talk of OPEC coming together with some sort of plan and production cuts by commodity producers spooked the Bears and we saw the result.  Many commodity and energy companies were up 50% to 100% in a week, albeit from very low prices.

I think we need to see more of this.  The Bears will continue to pressure stocks and suffer sharp short-covering rallies.  This has to go on until the bears are worn out.  Only then will the Bulls be able to commit to stocks and we can see a sustainable rally to new highs.

How long will this take?  It is uncertain.

Clearly better economic data out of the US and China would help.

Continued stabilization in commodity prices would help as well.

For investors, the key to navigating these volatile markets is having a long-term view.  If one can look beyond the next week or next few months, the sharp declines will not look like panics but rather will come into focus as opportunities.

— Ian Green, Pendragon Capital Management

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Note: This blog article is intended for general informational purposes only. Nothing in it should be construed as, and may not be used in connection with, an offer to sell, or a solicitation of an offer to buy or hold, an interest in any security or investment product.