by Ed Wijaranakula, NMS Investment Research
The S&P 500 closed at 2,096.07 on Friday, down just 0.15% for the week as the index retests the trendline support after its breakout in late-May. The U.S. is one step closer to a recession, signaled by the yield spread between the 10-year and 2-year U.S. Treasury Notes that dipped for the first time in over 8 years to below 0.9 percentage points. The U.S. dollar index rebounded 0.64% for the week, after plunging 1.54% last week, to close on Friday at 94.631.
On Tuesday, the World Bank trimmed the 2016 GDP growth forecasts for the U.S. to 1.9% and eurozone to 1.6%, but kept China's growth forecast unchanged at 6.7%. Japan's economic growth forecast for 2016 was slashed to just 0.5%. The global financial markets were getting nervous, as the 10-year Japanese government bond, or JGB, yield dropped to negative 0.151% at the close on Friday, while the 10-year German bund yield printed at 0.019%, both record lows.
Billionaire investor George Soros, a prominent contributor for presumptive presidential nominee Hillary Clinton and other Democrats, said he sees economic trouble ahead and disclosed in the regulatory filings at the SEC in May that he took a large stake in gold mining companies, such as Barrick Gold Corp, according to The Wall Street Journal. Obviously, large investors don't believe politicians much about how great the U.S. economy is.
The best performing S&P 500 sectors for the week were Telecommunication services and Energy, up 2.79% and 1.38%, respectively. Energy was the worst performing sector last week. The worst performing sectors for the week were Financials and Consumer discretionary, which were down 1.55% and 0.89%, respectively. Financials was the worst performing sector last week. Fund managers are rotating out of Financials and rotated into Utilities, up 15.95% year-to-date, in anticipation of a U.S. economic downturn.
The S&P 500 Biotechnology subsector sold off, down 5.59% for the week, after Hillary Clinton now has more than the required 2,383 delegates to become the official Democratic Party nominee for the U.S. Presidential election in November. Clinton has been running her campaign with rhetoric against the pharmaceutical and biotechnology industries based on issues of high prescription drug costs, although her proposed plan to cut costs would made the situation worse, according to Forbes.
Federal Reserve Chair Janet Yellen continued her double-speak on Monday about the U.S. economic outlook and the prospects of interest rate hikes. Yellen shrugged off the worse-than-expected May U.S. nonfarm payrolls report last Friday and insisted that gradual increases in the federal funds rate are likely to be appropriate. She remained vague about the timing of a next rate increase, though.
Since August 2015, the S&P 500 has been positively correlated with the WTI crude oil price. Traders, including algorithmic and high-frequency traders, or HFT, may be creating greater profit opportunities by coupling the volatility and price swings in the crude oil futures market with the S&P 500 index.
The WTI crude oil spot price was unchanged for the week, closing at $48.88 per barrel on Friday, while the Brent crude price inched up 1.03% for the week to close at $50.39 per barrel, despite supply disruptions caused by multiple attacks on key pipelines and facilities in Nigeria by a militant group earlier in the week, and bullish weekly crude oil inventory reports.
The Energy Information Administration, or EIA, weekly U.S. oil inventory report on Wednesday showed a decline of 3.2 million barrels to 532.5 million barrels in the week ending June 3, compared to analysts' expectations for a drawdown of 2.7 million barrels. The American Petroleum Institute, or API, inventory data on Tuesday showed U.S. crude inventories decreased by 3.56 million barrels.
There are signs that the U.S. is ramping up its crude oil production, which will add to the inventory glut. The EIA said the weekly U.S. crude oil production increased by 10,000 barrels per day, or bpd, for the week ending June 3, 2016, after eighteen consecutive weeks of declines, to 8.745 million bpd. Weekly U.S. crude oil output has still fallen about 9% 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 was up another 3 from the previous week, for the second straight week, at 328, but still down 79.61% from the peak number of 1,609 in October 2014. No one knows how many additional bpd will be produced, as there is no direct correlation between crude oil production and the number of rigs. One can imagine that the most productive ones would be brought back into operation first.
History could repeat itself, as the yield spread between the 10-year and 2-year U.S. Treasury Notes is falling of the cliff. From a historical perspective of the Fed leading up to the last U.S. recession, from December 2007 through March 2009, the Fed began hiking the short-term rate from 1.0% to 1.25% in June 2004 as the yield spread between the 10-year and 2-year U.S. Treasury Notes stood at 1.9 percentage points. By the time the Fed raised the key rate by a quarter-percentage point to 5.25% for the last time in June 2006, the yield spread was already in negative territory. Rising crude oil prices exacerbated the situation. About 12 months after the yield spread was negative, the U.S. went into a deep recession until early 2009.
It might still be too early to get out of the market, though!
S&P 500 Summary: +2.55% YTD as of 06/10/16
Barclay Hedge Fund Index: +0.92% YTD
Outperforming Sectors: Utilities +15.95% YTD, Telecommunication services +14.63% YTD, Energy +11.75% YTD, Materials +9.34% YTD, Consumer staples +6.64% YTD and Industrials +5.38% YTD.
Underperforming Sectors: Information technology +0.54% YTD, Consumer discretionary +0.15% YTD, Healthcare - 0.75% YTD and Financials -3.23% YTD.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.