Stocks backpedaled last week, pressured on one side by a strengthening U.S. dollar and on the other by falling energy prices. Shares of large-cap firms in particular—thanks to foreign exposure—suffered most from the downward pressure, while more domestic revenue-oriented small caps bucked the trend and rose sharply.

Some investors lightened up on equities in anxious anticipation of the Federal Open Market Committee meeting this week. No rate hike is expected just yet, but investors fear wording changes in the FOMC’s press release Wednesday that could spook the market.

Oil prices again lost ground, after a few weeks of stability, reigniting worries about energy stocks, which fell 3%, and deflation anxieties. Oil fell 10% to $44.84 per barrel. U.S. economic data ran the gamut from weak, like February retail sales, to good, like weekly jobless claims, but played a background role.

Last week, the Dow Jones Industrial Average lost 108, or 0.6%, to 17,749.31, while the Standard & Poor’s 500 index fell 18 points to 2053.40. The Nasdaq Composite dropped 56, or 1.1%, to 4871.76. The small cap Russell 2000 index gained 1.2% to 1232.13.

A strong dollar is better for Corporate America long term, adds Halliburton, but “in the current world, investors are at most interested in the next 12 months.” The dollar index is on course for a 13.8% gain in the first quarter, the largest quarterly jump since the 1992 European monetary crisis, according to Bank of America Merrill Lynch.

Headlines bemoan the dollar, but the U.S. is a net importer, so the average Joe and Jane see greater purchasing power and lower inflation. U.S. companies have to get leaner and meaner. While U.S. exports cost foreigners more and the translation hurts earnings comparisons in the short term, U.S. firms have more buying power overseas. A stronger dollar makes U.S. assets more attractive to foreigners. The February producer price index released Friday declined 0.5%, weaker than anticipated.

Though the market expects a Fed hike around June, Scott Colyer, CEO of Advisors Asset Management, demurs. The PPI shows no sign of inflation. “The downside to the Fed of doing nothing is pretty minimal, while a hike could threaten the recovery,” says Colyer, who believes the Fed won’t raise interest rates until 2016.

Whether it’s June or January, it’s hard to see the market moving sustainably higher until the Fed drops the veil.

(Source: Barrons Online)