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U.S. stocks and oil stick together but decouple from China

By Kevin Mahn, Hennion & Walsh Asset Management

U.S. equity markets began March strong, capping off a second consecutive week of gains, inching closer to their end-of-2015 levels on the back of a decoupling between U.S. stock and oil prices from the Chinese stock market. This decoupling could mark a significant shift in market sentiment, and we're anxious to see if U.S. stock prices will eventually decouple from oil prices as well.

Last week, the S&P 500 Index gained 1.6% and WTI Oil gained 10.6%, while the CSI 300 Index (measuring the performance of China’s mainland stock exchange) fell 3.4%. The S&P 500 Index is now down 2.9% for 2016, 7.9% higher than the nearly two-year low of 1829 reached on February 11, 2016—a level not seen since April 11, 2014.

In terms of the different market capitalizations, last week’s returns were fairly well balanced with both small- and mid-cap U.S. stocks gaining approximately 2.7% each. When looking at year-to-date returns, however, the divergence in performance across large-, mid-, and small-cap stocks is clearly defined. Mid-cap stocks, as measured by the Russell MidCap Index, finished last week down 5% for the year, while small-cap stocks, as measured by Russell 2000 Index, were down 8.5%, nearly twice as much as the larger-cap stock returns referenced above.

Earnings season is all but completed with 96% of S&P 500 components having reported 4Q earnings, but a busy week of economic data awaits investors as the monthly employment situation is set for release on Friday. This report will help market participants weigh the prospects of additional interest rate hikes by the Federal Reserve this year as the unemployment rate currently sits at 4.9%—in line with the FOMC’s long-run projections.

The unprecedented confluence of low economic growth and the potential for additional hikes in the Federal Reserve’s target federal funds rate will impact the portfolios of all U.S. investors. However, there are pockets of opportunities to be found in the current market environment. As always, tread carefully and consult with your advisors before making any major realloctation decisions.

 

Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 03/01/16. Rates and Economic Calendar Data from Bloomberg as of 02/26/16.

Disclosures: Past performance does not guarantee future results. We have taken this information from sources that we believe to be reliable and accurate. Hennion and Walsh cannot guarantee the accuracy of said information and cannot be held liable.