EQM Capital LLC – February 2016 Market Commentary – Shifting Gears

Posted on Mar 3, 2016

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Shift in Rate Expectations

The financial markets remained volatile in the month of February, thanks to concerns about disappointing economic data, supply/demand imbalances in oil, and global economic malaise. Now that the Bank of Japan and Europe have implemented a negative interest rate policy, the U.S. Federal Reserve remains one of the few central banks in positive territory.

The market started the year expecting multiple interest rate increases. But recent global developments have tempered Fed policy, now making it unlikely that it will raise rates in March or any time soon.

Through mid-February investors had been pricing in the heightened possibility of a U.S. recession. But market sentiment reversed in the second half of the month thanks to better economic data and a recovery in oil prices. The market rebound took large-cap benchmarks out of correction territory (defined as a decline of more than 10%), and the S&P 500 TR Index finished flat for the month.

Shift in Oil Policy

Oil prices hit a 13-year low of $26 a barrel on February 11. Since then, prices rallied more than 30% on news on February 17 that OPEC, Saudi Arabia, Russia, and other producers agreed to a tentative deal to freeze output. This appeared to trigger a bottom in oil prices and help soothe market fears.

The market had been worried about the systemic effect on the U.S. economy if oil prices continued to fall and oil companies defaulted on their debt. That could potentially trickle down to other economic sectors and drive the economy into recession.

And then there is the impact of the global economy. Investors have been fearful that the oil glut was a sign that the global economy was in even worse shape than originally thought. A global recession had the potential to undermine economic conditions at home and propel the U.S. into recession as well.

Shift in Market Sentiment: Oil Prices and Market Sentiment De-Couple

So the news that oil producers seemed to finally be getting serious about curbing production, coupled with some better economic data, caused a turn in market sentiment. U.S. markets have started to trade on their own merits again, becoming uncorrelated with oil prices. Investors are becoming less “fixated” on the oil situation and global macro concerns and refocusing their attention on company fundamentals.


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