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The most dramatic price movements in the first quarter took place in the currency markets. In contrast to the improving US economy with higher interest rates on the horizon, the European Central Bank has embarked on an historic $1.16 trillion stimulus plan in order to stem a recessionary wave of deflation occurring on the Continent. This, plus the plunge in oil prices (which is measured in dollars) has driven the US dollar to highs against all other currencies not seen in years. The effect is exacerbated by the Federal Reserve terminating its “QE” stimulus program last October.
At what point does a strong dollar begin to impact US corporate earnings, as multinational U.S companies face the double threat of their products becoming relatively more expensive abroad and other foreign competitor’s products becoming cheaper in the US? Dollar strength is already taking a bite out of profit expectations, particularly of large multinational firms. Last year analysts expected first-quarter S&P 500 profits to grow by 9.5%, and by 11.6% for all of 2015. Now, first-quarter profits are expected to fall by 4.9% in Q1 and to grow by only 2.1% for all of 2015. Consequently, U.S. companies with a strong domestic orientation, as well as European companies benefiting from a stronger dollar are outperforming.
Emerging markets are experiencing a significant net outflow of capital for the first time since the financial crisis. Oil producing countries with large current account deficits, like Russia and Venezuela, have experienced severe setbacks in their economies and their credit ratings. There is no lack of worrisome events worldwide whose outcomes are unpredictable: The Greek government is losing credibility as it attempts to refinance its debt, ISIS continues to spread its violence in the Middle East, Iran nuclear negotiations could still break down, and Israel may strike Iran militarily if they do.
Yet stock market volatility, as measured by the VIX index, is below average, which suggests that we may be in for increased price fluctuation ahead.
The US Department of Energy is forecasting a sharp slowdown in US shale oil production growth. The number of US oil rigs in operation has fallen to 802 from a high of 1609 last October. The number of active rigs in past oil recessions usually declines between 40 and 60%. Given that the oil rig count fell by very little last week, speculation is building that the price of oil has finally bottomed out. It remains to be seen whether a nuclear deal with Iran has a successful conclusion. If it does, there will be an additional estimated 1 million barrels of oil per day which has largely been built into the market. If the Iran deal falls through, it is likely to push prices higher. Last week, US oil production actually declined somewhat, while demand growth surprised on the upside. Americans are driving more, and gasoline consumption has increased by a half million barrels per day due to low prices. Any military surprises in the Middle East this year will squeeze oil prices sharply higher.
The US job number issued last week was considered a disappointment. While the unemployment level remained at 5.5% there were only 126,000 jobs created in March, considerably less than the 264,000 figure for February and far less than the 200,000+ job creations per month over the last 12 months. This is most likely attributable to three factors: a higher dollar, bad weather, and the slowdown in the oil industry leading to job layoffs. Nonetheless, the labor force participation rate, now at 62.7%, is at its lowest level since 1978, which contradicts the rosy picture painted by the standard unemployment rate. This data supports the view that interest rate increases by the Fed will be put off further in time.
Whether or not the Federal Reserve hikes interest rates as expected, it is unlikely that the bull market for stocks comes to an end until short and long term interest rates are considerably higher.

The S&P 500 rose 0.4% over the first quarter, the Dow lost 0.3%, and the Nasdaq gained 3.5%.
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Grant Rogers

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