March was volatile, but seasonality patterns prevailed, as stocks performed well in the last half of the month. As you can see in a chart shown in this episode, historical April seasonality trends suggest that last week’s positive momentum could continue. Since 1950, the S&P 500 has posted an average of 1.5% growth in April and has finished positive during the month 71% of the time. The first half of April is usually strong, with the first 12 trading days historically climbing 1.4%. While there are still concerns about the Federal Reserve slowing the economy down and the continued fallout from the banking crisis, the market is showing strength in a historically strong period of the year. Of course, there are no guarantees, but this positive development gives us hope that the strength seen last week can continue.
In a surprise announcement, OPEC recently said they were cutting oil production to nearly 1.2 million barrels daily. That’s in addition to the two million barrels they announced they were cutting back in October, along with the 500,000 barrels a day Russia announced that they are taking offline. Altogether, around 3% of the world’s oil production is coming offline. Saudi Arabia announced that the cut would go into effect in May, just in time for driving season here in the US. The summer driving season is when we use a large percentage of our annual gasoline usage, so oil prices immediately reacted this morning, reaching as high as $81 a barrel. Barrels were as low as $66 earlier in March, so oil markets responded quickly to this news. So, why would Saudi Arabia cut oil production and make a surprise announcement? Our research partners at Strategus put out a chart that helps explain what Saudi Arabia was looking at. It shows that each country in OPEC has a specific barrel price that they need to balance their budget. When we hear of oil prices, we think of companies and their cost per barrel and relate it to how much it is to get it out of the ground. Well, most of these OPEC countries run their entire country on oil, so this is what their beak-even is. This price is not on production but to balance their entire economy. Saudi Arabia, the largest producer, needs $67 a barrel to balance their budget. That’s in line with where we were in mid-March. So, this cut is more of a point of survival for them. They have to get their budget in line, so they must reduce their production to get prices back up. This is a significant change from 2014 to 2015, when the US was the swing producer, and Saudi Arabia was trying to cut oil production to boost prices. This didn’t have the same effect back then as it does now since the US is no longer the swing producer. We’re returning to an oil shock environment like the seventies, where when the OPEC countries speak, the market reacts immediately. It’s not set in stone, but we could see a rise in gas prices around May or June. This could be an early indicator that inflation may not be on the downward trajectory like we hoped and is something that we are internalizing here to project where interest rates, inflation, and the Fed may be going from here.
Inflation and The Fed
March marked the one-year anniversary of the start of the Fed’s tightening cycle. This rapid tightening cycle has been the fastest since the 1980s. Coincidentally, since the early 1980s, this is the first time stocks haven’t been up in a 12-month period since the first rate hike was announced. So looking forward, what can we expect? In a chart shown in this episode, you will see that before the OPEC news, inflation was projected to come down enough to where the Fed could raise rates without actually raising rates. How do they do that? The Fed Funds Rate is expected to be 5%, but their next meeting isn’t scheduled until May. According to this chart, we are looking for a pause in rate hikes thanks to inflation coming down. Historically, we’ve seen a pause when the Fed Funds Rate is above the inflation number, not a rate cut, but at least a pause. We could see that as early as this month as long as the OPEC news doesn’t swing too much. It will be interesting to see how we move forward and if we can get inflation down enough. If rates plateau, that’ll help the consumer with mortgage payments, car payments, and other things.
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