STOCKS GO NOWHERE: Here's what you need to know

Stocks finished the day little-changed to cap a busy week that saw little action in the final day of trading for the equity markets.

First, the scoreboard:

  • Dow: 16,652, -45, (-0.3%)
  • S&P 500: 1,949, -2, (-0.2%)
  • Nasdaq: 4,591, +9, (+0.2%)
  • WTI crude oil: $32.95, (-0.1%)

Stock Market

Jeff Gundlach bought some stocks.

“I thought it was a good buy point two weeks ago Wednesday and so we bought some,” Gundlach told Reuters’ Jennifer Ablan.

Congrats, Jeff!

Recall that last month Gundlach said he wasn’t interested in buying oil or high-yield bonds — at that point — as he prefers to avoid things that go down in price every single day. And look, we know that most investors don’t buy things they think will get less valuable, but Gundlach — who is a bond fund manager — doesn’t need to go outside his usual asset class unless he has a real strong conviction. So, he bought stocks. Noted.

Meanwhile, research out of UBS indicates that the volatility of earnings estimates is at the highest since 2010, setting the stage for continued choppiness in stocks. Julian Emanual, the top stock strategist at UBS, notes that indications are the risks for big swings in stock prices currently point upwards.

“Putting it all together,” Emanuel writes, “we believe that earnings risk remains largely balanced with the potential for upside surprises to ‘be more surprising’ given the historically high volatility and unidirectional (down) aspect of consensus revisions. Paired with historically defensive investor sentiment which has frequently presaged meaningful rallies, we continue to view risk to US equities as skewed to the upside.”

And in hedge fund land, stocks investors are selling short are rising.

Or as Goldman Sachs writes, the return on the most shorted stocks in the US over the last three months, “reached heights not seen since the third quarter of 2011 — when Standard & Poor’s cut the US’s triple-A credit rating — and even exceeded the peak during the financial crisis in 2008.”

Not great.

If you wanted to do something great in the stock market, investing with Warren Buffett back in the day would have done the trick. (Of course, that’s not really fair to either Buffett or investors who didn’t invest with him: it was a once-in-a-lifetime buy 30 years ago and looking for these kinds of returns is simply not realistic.)

Recession Watch, 2016

In the fourth quarter of 2015 the US economy grew at 1% pace.

This is faster than the 0.7% pace initially reported last month with the BEA’s first estimate of GDP and Friday’s second estimate for the measure beat expectations for a 0.4% increase in the economy.

And while a less-disappointing end to 2015 — and make no mistake, growing at a 1% pace is disappointing — is another win for those arguing the US economy is not heading for recession, Ian Shepherdson at Pantheon Macroeconomics noted that this likely takes some growth that had been forecast for the first quarter of this year and pulls it forward. (Or something like that.)

Here’s Shepherdson:

“Other things equal, the upward revision to inventories implies weaker growth than currently expected in Q1, because the difference between the level of inventory and where it needs to be — in order to restore prior norms, relative to sales — is bigger than previously believed.”

The Atlanta Fed’s GDPNow tracker sees first quarter GDP growing at a 2.1% pace.

Elsewhere, consumer confidence topped expectations on Friday with the final reading on sentiment in February out of the University of Michigan coming at 91.7, better than the 91.0 that was expected. This reading is, however, down from January’s 98.1 reading.

Richard Curtin, chief economist for the survey, said Friday that, “Consumers’ most important concern involves how much the slowdown in GDP growth will affect employment growth. At present, consumers anticipate only a slight negative impact on jobs.”

The February jobs report is next Friday.

Inflation

We’re seeing inflation make a comeback.

On Friday the latest data on “core” PCE — an alternative inflation measure that excludes the more volatile costs of food and gas and is favoured by the Federal Reserve — showed prices rose 1.7% over last year in January.

Last week, the consumer price index, a more widely-cited measure of inflation, showed “core” prices ticked up 2.2% over last year. PCE prices are what goes into the GDP calculation.

“Core” PCE was expected to show prices rose 1.5% in January.

And so with inflation perking up the Fed is getting ever-closer to satisfying the second of its two mandates — we’d argue that the “full employment” mandate has been met — the March policy statement from the Fed seems likely to be a closer call than previously assumed by the markets.

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