Do Rotten Stock Markets Indicate Economic Trouble Ahead?

January was a rotten month for stock markets, but what is the action is telling us? Is the economy about to careen into a recession or did stocks get ahead of the broader economy and are now resetting lower, to a more reasonable level? My guess is that it's the later, but the answer will only be evident in hindsight. Here’s what we know: the economy slowed to a measly 0.7 percent annualized pace in the fourth quarter, dragged down by business investment (-1.8 percent) and net exports (-0.5 percent). Plunging energy prices was the culprit for the weak reading on business investment. Within the category, there was a 5.3 percent drop in structures investment, which was mainly due to the collapse in drilling activity. According to Capital Economics, “mining structures investment fell by 51 percent in 2015, subtracting 0.4 percentage points from overall GDP.”

Exports and inventories were down primarily due to a strong dollar. Although growth was only 2.4 percent for all of last year, essentially matching the slower than normal pace of the previous three years, U.S. GDP is better than other developed nations, like Europe and Japan. That’s why the dollar Index is up by more than 20 percent over the past two years. A strengthening greenback is great for consumers who are purchasing French cheese or Italian olive oil, but it also makes U.S. goods costlier overseas, which has put the manufacturing sector into a deep funk.

One bright spot in the GDP was consumer spending. Although consumption slowed to 2.2 percent in the fourth quarter, from 3 percent in the third, for all of 2015, consumption grew at the fastest pace in a decade, according to Joel Naroff of Naroff Economic Advisors. He notes, “given that the warm December meant a lot lower heating bills and very little reason to buy winter-related products such as sweaters or shovels, it [the 2.2 percent reading] was actually quite good.”

Americans may be spending, but they are not going crazy. Overall after-tax income increased by 3.2 percent at an annualized inflation-adjusted basis, but instead of blowing it, more people chose to bank those extra shekels. The personal savings rate jumped to 5.4 percent, the highest level since 2012 and a far cry from the negative rate seen in mid 2005.

Fed/Jobs Watch: The drop off in US growth kept the Fed on hold in January and investors think that the current economic uncertainty will clear up by the time of the next FOMC meeting in March. Futures markets anticipate only one additional quarter-point rate hike by the end of this year. It is important to underscore the US monetary policy remains accommodative—after all, the inflation-adjusted fed funds rate is still well below zero.

To determine whether or not to raise in March, the Fed will keep a close eye on economic data and the labor market. The January employment report, which is due on Friday, is expected to show that 200,000 jobs were created and the unemployment rate will remain at 5 percent. There may even be an upside surprise, as companies have recently been reporting that they are finding those job vacancies harder to fill and households say that jobs are plentiful.

Oil, Oil Everywhere: And finally, a word about oil…an old commodities trader once told me: “Honey (it was 1987), there are only two things to analyze with commodities: supply and demand.” The 2015/early 2016 oil selloff has been attributed to weak demand, reflecting fears of a slowdown in China’s economic growth and, consequently, its demand for oil.

But Capital Economics points out that the Energy Information Administration’ short- term outlook “shows that Chinese petroleum consumption has continued to rise at roughly the same pace as before. Instead, the slump in global oil prices appears to be predominantly due to the surge in supply that began in 2014 (a lot of it due to higher US shale output) rather than weaker world demand.”

MARKETS: Negative is a Positive for markets. Persistently weak growth in Japan and the rest of the world prompted the Japanese central bank to join other central banks (ECB, Sweden, Denmark, Switzerland) to push deposit interest rates for new reserves into negative territory. That means that a Japanese commercial bank will have to pay for the privilege of sitting on cash. The government hopes that the move will encourage banks to lend more, which would in turn create more spending. Investors saw the action as evidence that both Japan and Europe would like have to resort to more stimuluative measures in the future, which pushed stocks higher on Friday. It was not enough to save the dreadful month, but it coulda’ been worse!

• DJIA: 16,466 up 2.3% on week, down 5.5% MTD/YTD
• S&P 500: 1940 up 1.8% on week, down 5.1% YTD
• NASDAQ: 4613 up 0.5% on week, down 7.9% YTD
• Russell 2000: 1035, up 1.3% on week, down 8.8% YTD
• Shanghai Composite: down 23% in Jan, the largest monthly drop since 2008. The index has fallen by nearly 50% since its peak in June 2015, but remains 33% above its level in mid-2014, before the bubble began
• 10-Year Treasury yield: 1.93% (from 2.06% a week ago)
• Mar Crude: $33.62, up 4.4% on week, down 9.2% MTD/YTD and up 27% from Jan 20 low)
• Apr Gold: $1,116.40, up 1.8% on week, +5.3% MTD/YTD
• AAA Nat'l avg. for gallon of reg. gas: $1.80 (from $1.84 wk ago, $2.05 a year ago)

THE WEEK AHEAD:

Mon 2/1:

Aetna, Alphabet (formerly known as Google)

8:30 Personal Income and Spending

9:45 PMI Manufacturing Index

10:00 ISM Manufacturing Index

10:00 Construction Spending

Tues 2/2:

Exxon Mobil, Dow Chemical, UPS, Yahoo

Motor Vehicle Sales

Weds 2/3:

GM, Merck, MetLife, Yum! Brands

8:15 ADP Private Employment Report

9:45 PMI Service Index

Thursday 2/4:

8:30 Productivity Costs

10:00 Factory Orders

Friday 2/5:

8:30 Jan Employment Report

3:00 Consumer Credit

Will Stock Correction Lead to Bear Market?

The first two weeks of the year have been the worst ever for US stock indexes. Indexes are now in correction territory for the second time in six months and the big swings are testing every investor’s internal fortitude and begging the question: will the correction lead to the first bear market in nearly seven years? Understandably, this period may cause a bit of déjà vu all over again, but the current situation is not like 2008 for many reasons. The first of which is that there is no financial crisis brewing and the second is that US economy, while not strong, is still growing by about 2-2.5 percent annually. Although some investors may be tempted to sell, they do so at their own peril. Market timing requires you to make two precise decisions, when to sell and then when to buy back in, something that is nearly impossible. The data show that when investors react, they generally make the wrong decision, which explains why the average investor has earned half of what they would have earned by buying and holding an S&P index fund.

The best way to avoid falling into the trap of letting your emotions dictate your investment decisions is to remember that you’re a long-term investor, who doesn’t have all of your eggs in one basket. Try to adhere to a diversified portfolio strategy, based on your goals, risk tolerance and time horizon -- one that is not reactive to short-term market conditions, because over the long term, it works. It’s not easy to do, but sometimes the best action is NO ACTION.

Where the markets will go throughout the rest of 2016 depends on the answer to the following six questions:

1) Will Chinese growth accelerate? The cause of the early part of the New Year's sell-off was anxiety over a slowdown in China (sometimes referred to as a “hard landing”), which sent stocks there into a bear market, down 20 percent since the December high. This is not a new fear—investors have believed that a downshift in growth in the world’s second largest economy would inflict pain on the rest of the world, especially as China shifts from an economy that relies on government investment in building and infrastructure as well as manufacturing to one that is more consumer-based.

2) How many Fed Rate increases? The central bank pledged to raise rates gradually—according to its own projections, there are likely to be four quarter-point increases in 2016. But the bond market thinks that there will only be two, due to slower growth. If the Fed is correct, it would mean that US growth continues to accelerate and that inflation will rise towards the target 2 percent; if the bond market is correct, growth and inflation will likely stall in 2016.

3) Will crude oil steady/fall further/rise? Oil’s shaky start (down about 20 percent in the first two weeks of the year), comes after last year’s 30 percent drop and 2014’s 46 percent plunge. Crude is now down over 70 percent over the past 18 months. With Chinese demand cooling and supply remaining high -- the world is producing 1 million barrels of oil more than it’s consuming, which is pushing prices down. That’s good news for consumers, who will either save or spend the savings at the pumps, but bad news for energy companies, whose earnings are going to get shellacked.

4) Will US Economic Growth Accelerate? GDP growth last year is likely to come in around 2.25 percent, matching the results of the previous three years. Analysts are expecting growth of 2.5 percent in 2016, with some thinking that a recession is imminent. Part of the answer to this question may also be found in the movement of the US dollar, which in trade-weighted terms, is close to a ten-year high. With anxiety in China and emerging markets pushing capital to the US, the dollar could continue to rise, which would be bad news for US manufacturers and likely keep inflation too low in the eyes of the Federal Reserve.

5) Will Wages Finally Rise? The economy added 2.65 million jobs in 2015, the second best year for job creation in the past 15 years. (The best was 2014). While there was progress on job creation and the unemployment rate (5 percent), wage growth has lagged. With a tightening labor market, employers may have to dig deep and pay up to attract and retain qualified talent. That would be good news for workers, but not so hot for corporate America.

6) Will the Bear Emerge? The current bull market in US stocks turns seven years old in March, making it the third longest in history (1987-2000 is the winner, followed by 1949-1956). Just because the bull is aging, does not mean that it is doomed. However, it does mean that the pressure is mounting for companies to deliver earnings growth in a year when their compensation expenses are likely to rise, but they are unable to pass on those additional costs to customers.

By the way, since the end of World War II (1945), there have been 12 full-blown bear markets (with losses of 20% +). Statistically they occur about 1 out of every 3.5 years, and last an average of 367 days.

MARKETS: All three indices are in correction territory and the Russell 2000 index of small stocks, as well as certain other indexes like the Dow transports, is already in a bear market, defined as a 20 percent decline from the highs. For the Dow, which would be 14,681; for the S&P 500, it would be 1,708; and the NASDAQ would be in bear market territory if it hit 4,185.

• DJIA: 15,988 down 2.2% on week, down 8.2% YTD (8/24/15 low: 15,370)
• S&P 500: 1880 down 2.2% on week, down 8% YTD (8/24/15 low: 1867)
• NASDAQ: 4643 down 3.3% on week, down 10.4% YTD (8/24/15 low: 4292)
• Russell 2000: 1007, down 3.7% on week, down 11.3% YTD, down 23% from 6/15 high)
• 10-Year Treasury yield: 2.04% (from 2.12% a week ago)
• Feb Crude: $29.42, down 10.5% on week, lowest settle since Nov 2003
• Feb Gold: $1,091.50, down 0.7% on week
• AAA Nat'l avg. for gallon of reg. gas: $1.91 (from $1.98 wk ago, $2.08 a year ago)

THE WEEK AHEAD:

Mon 1/18: US Markets closed for MLK Day

Tues 1/19:

Morgan Stanley, Bank of America, IBM, Netflix

China Economic Data: Q4 GDP, industrial production, retail sales

10:00 Housing Market Index

Weds 1/20:

Goldman Sachs

8:30 CPI

8:30 Housing Starts

Thursday 1/21:

Starbucks, Schlumberger

Friday 1/22:

General Electric

10:00 Existing Home Sales

2015 Markets: Nowhere to Run, Nowhere to Hide

“2015 was the worst year for U.S. stocks since 2008” is the headline you are likely to see, but going by the numbers, it wasn’t that bad -- or was it? The S&P 500 was down by less than 1 percent, though including reinvested dividends, the index eked out a gain. Small caps fared worse, with the Russell 2000 falling nearly 6 percent, but the NASDAQ increased by 5.7 percent, so not so bad, right? The real problem for disciplined investors who adhered to diversified asset allocation models last year was that there was simply “Nowhere to run to, baby, Nowhere to hide” (h/t Martha and the Vandellas). In fact, 2015 was only similar to 2008 in that many asset classes moved in tandem. If you recall Asset Allocation 101, the whole point is that when stocks zig, another asset class like commodities zags. Yet, the S&P 500 and the Nymex crude oil “both closed down on 87 out of 252 trading sessions in the year. That’s the most in any year since at least 1984”, according to data from The Wall Street Journal’s statistics group.

And if you are the type of investor who sprinkled a dash of the more far-afield asset classes to add a little spice to your portfolio, 2015 may have been far worse. In addition to the crushing performance of oil and commodities, the MSCI emerging equity index was down 17 percent in 2015, its fifth straight year of underperformance versus developed indexes, as the toxic trifecta of slowing growth in China, the commodity washout and a rising US dollar were simply too much for the index to bear.

Maybe you sought to juice up your fixed income return with riskier bonds last year. If so, that decision hurt. The Barclays US corporate high-yield bond index lost 4.5 percent, while longer-dated corporate credit for investment grade holdings, slid 4.6 percent. Had you simply stuck with a boring intermediate term bond index, you would have seen small gains on the year. According to data compiled by Bianco Research LLC and Bloomberg, a case can be made that 2015 “was the worst year for asset-allocating bulls in almost 80 years.”

Does that mean that asset allocation does not work? Perhaps you have a case of investor amnesia and forgot about the dreadful first decade of the 21^st century. From 2000 to 2010, the annualized return of the S&P 500, including dividends, was just a paltry 1.4 percent per year. During that same time frame, the Russell 2000 was up 6.3 percent and MSCI Emerging Markets Index jumped 16.2 percent. And if you had owned bonds, your performance improved dramatically. During those ten years, a portfolio of 60 percent equities (split among different types of stocks) and 40 percent fixed income had an annualized return of 7.83 percent.

Does asset allocation work? Over the long term, YES!

2015 Performance

• DJIA 17,425: down 2.2%
• S&P 500 2,043: down 0.7%
• NASDAQ 5,007: up 5.7%
• Russell 2000 1135: down 5.7%
• Shanghai Composite 3539: up 9.4%, despite plunging 43% from its intra-day peak on June 12 to the bottom on Aug. 26
• Stoxx Europe 600 365: up 6.8%
• 10-Year Treasury yield: 2.273% (from 2.173% a year ago)
• US Dollar: up 9.3 percent
• Feb Crude $37.07: down 30.5%
• Feb Gold $1,060.50: down 10.7%, lowest since Feb 2010
• AAA Nat'l avg. for gallon of reg. gas: $1.99 (from $2.00 wk ago, $2.23 a year ago)

THE WEEK AHEAD: Hopefully you got some rest over the holidays, because it is going to be a very busy first week of the year, highlighted by the December jobs report on Friday.

Mon 1/4:

9:45 PMI Manufacturing Index

10:00 ISM Mfg Index

10:00 Construction Spending

Tues 1/5:

Motor Vehicle Sales

Weds 1/6:

8:15 ADP Employment Report

8:30 International Trade

9:45 PMI Services Index

10:00 Factory Orders

10:00 ISM Non-Mfg Index

2:00 FOMC Minutes

Thursday 1/7:

8:30 Weekly Jobless Claims

Friday 1/8:

8:30 December Employment Report

3:00 Consumer Credit

Does Plunging Oil Portend Recession?

Crude oil has tumbled 15 percent in the past ten trading session, approaching the summertime low of nearly $40 a barrel. That means it’s time for one of the favorite economic themes of 2015: “Plunging demand for oil is the harbinger of a recession”. As recounted many times in this space, there has indeed been a drop off in activity in China and those emerging markets, which rely on trade with the world’s second largest economy. But surprisingly, as demand for oil has drifted down, supply has increased. That’s not supposed to happen, at least in the econ textbooks. You know how it works: demand weakens, prompting suppliers to cut back and then prices start to climb back up. But around the globe, production levels have remained robust. US, Russia, Saudi Arabia and other Persian Gulf states are keeping the spigots open, creating a glut of oil.

The good news is that gas prices have resumed a downward slide. AAA says that the average price for a gallon of regular gas is $2.18, down from $2.91 a year ago, with prices below $2 in many areas. AAA spokesman Avery Ash said “It looks increasingly likely that drivers will find the cheapest gas prices for both Thanksgiving and Christmas in seven years.”

Lest you think that Americans will use those savings at the pumps and beef up their holiday purchases, don’t bet on it. As gas prices have careened lower this year, there has been little evidence that consumers are spending it freely in the economy. Instead, they have been beefing up their cash reserves or saving for large purchases, like cars.

That parsimonious trend has been bad news for US economists, who have been hoping that our retail instincts would kick in and boost growth in the fourth quarter. It also may worrisome for the nation’s retailer’s, some of whom (Macy’s, Nordstrom) have been struggling, as the all-important holiday season is about to kick off.

But, wait…where’s that holiday optimism? OK, here it is: the last jobs report was really good, the service sector continues to advance and according to the Federal Reserve, “household spending and business fixed investment have been increasing at solid rates in recent months, and the housing sector has improved further.” That sounds pretty decent and not at all like a recession is imminent.

MARKETS: Investors broke a six-week winning streak in stocks, producing the largest percentage losses since the week ended August 21^st.

• DJIA: 17,245 down 3.7% on week, down 3.2% YTD
• S&P 500: 2,023 down 3.6% on week, down 1.7% YTD
• NASDAQ: 4,927 down 4.3% on week, up 4% YTD
• Russell 2000: 1146, down 4.4% on week, down 4.8% YTD
• 10-Year Treasury yield: 2.28% (from 2.32% a week ago)
• Dec Crude: $40.76, down 7.9% on week (biggest weekly loss in 7 months)
• Dec Gold: $1,080.90, down 0.6% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.18 (from $2.22 wk ago, $2.91 a year ago)

THE WEEK AHEAD:

Mon 11/16:

8:30 Empire State Manufacturing

Tues 11/17:

8:30 CPI

9:15 Industrial Production

10:00 Housing Market Index

Weds 11/18:

8:30 Housing Starts

2:00 FOMC Minutes

Weds 11/19:

10:00 Philly Fed

Weds 11/20:

Correction Reflection

Time flies when investors are enjoying a bull market. It has been four, mostly blissful years since the last 10 percent correction for stock markets. Back then, the fragile economic recovery was at risk due to a Congressional battle over raising the US debt ceiling limit. This time around, we have plain old anxiety about global economic growth. Although the U.S. economy continues to show improvement, the fear is that a slowdown in the world’s second largest economy – China – not to mention the cooling of once-hot emerging economies like Brazil and Russia, will impact the rest of the world. Considering that Europe and Japan are muddling along and the U.S. is only growing by about 2.5 percent a year, any significant headwind could pose a threat.

Yes, you have heard this story before, but previously, when sluggishness infected China, the government there would waive its magic wand and poof—things would pick up. This time, efforts by Beijing officials to intervene in its stock and currency markets have thus far failed to quell the slowdown fears.

As a result of the China deceleration story, commodities have also came under renewed pressure. After bouncing up to $60 per barrel earlier this year, fear that Chinese demand would wane, as U.S. and OPEC’s production remains high, culminated in an 8-week rout that left NY oil futures at $40.45 per barrel, the lowest price since March 2009. Crude is now 34 percent off its 2015 peak and down a staggering 62 percent from a year ago.

The sell-off in oil has pushed down the big energy companies in the Dow and S&P 500, but that’s not the only industry under pressure. Apple stock is down by more than 20 percent from its May high; 328 stocks within the S&P 500 are in correction territory; and about a quarter of them are down more than 20 percent. So, even though the S&P 500 has not yet dropped by 10 percent from its recent peak, two-thirds of its components are suffering mightily.

​​OK, so now you know what’s behind the market drubbing, but it is important to note that corrections are a normal part of market action. According to Capital Research and Management, through last year, 10 percent corrections occur about every year, so we have been long overdue for one. (20 percent bear markets occur about every 3 ½ years, so we are also due for one of those—the last one ended in March 2009.)

If you forgot about the downside risk of owning stocks, shame on you—there’s no crying in baseball or investing! Over the last 15 years, markets have shown that wild swings are part of being in the game. Hopefully, most investors learned the beauty of a diversified portfolio, one that can help avoid a cycle of buying high/selling low. Additionally, one of the big lessons of the financial crisis/bear market/Great Recession is that everyone should strive to keep at least six months in an emergency reserve fund-twelve months is preferable. If a big expense is coming up, the money necessary to cover it should never be at risk in the stock market.

MARKETS:

• DJIA: 16,459 down 5.8% on week, down 7.7% YTD (down 10.1% from peak)
• S&P 500: 1,970 down 5.8% on week, down 4.3% YTD (down 7.5% from peak)
• NASDAQ: 4,706 down 6.8% on week, down 0.6% YTD (down 9.8% from peak)
• Russell 2000: 1156, down 4.6% on week, down 4% YTD (down 10.5% from peak)
• 10-Year Treasury yield: 2.05% (from 2.2% a week ago)
• October Crude: $40.45, down 6.2% on week
• October Gold: $1,159.60, up 4.2% on week
• AAA Nat'l avg. for gallon of reg. gas: $2.61 (from $2.67 wk ago, $3.44 a year ago)

THE WEEK AHEAD: The market noise has left many wondering if the Federal Reserve might delay its lift off for rate increases. Before the sell-off, consensus was forming around a quarter point bump at the September meeting, but there could be more clues about the Fed’s thinking at the Jackson Hole symposium economic issues facing the U.S. and world economies occurs. The annual event, sponsored by the Kansas City Fed, has often been a place where central bankers introduce new policies, but Janet Yellen has decided not to participate, the first Fed chair to skip the Western sojourn in some time.

Mon 8/24:

8:30 Chicago Fed National Activity Index

Tues 8/25:

9:00 S&P Case-Shiller Home Price Index

10:00 New Home Sales

10:00 Consumer Confidence

Weds 8/26:

8:30 Durable Goods Orders

Thurs 8/27:

Federal Reserve Jackson Hole Symposium begins

8:30 GDP (Q2 2nd reading, expected to be revised from +2.3% to +3.2%)

8:30 Corporate Profits

10:00 Pending Home Sales Index

11:00 Kansas City Fed Manufacturing Index

Fri 8/28:

Federal Reserve Jackson Hole Symposium

8:30 Personal Income and Outlays

10:00 Consumer Sentiment

Jan Jobs: A Good Start to 2015

The economy added 257,000 jobs in January, slightly ahead of expectations; and the previous two months were revised higher, producing an additional 147,000 positions than the government previously reported. The economy has created more than a million new jobs in the last three months alone. That's the strongest pace of job growth we've seen since 1997. The unemployment rate edged up to 5.7 percent, but did so for the right reason, as more people entered the labor force in search of work. Yes, the participation rate, which tallies the share of Americans who are employed or are actively seeking employment, is still low—just 62.9 percent.

Before the recession started in late 2007, 66 percent of the working age population either had a job or was looking for one. Economists estimate about half of the drop is attributed to baby boomers retiring and the other half is likely due to the severity of the recession. Let’s hope the small 0.2 percent increase is the beginning of a more positive trend.

Perhaps the best part of the report was the nascent sign that American workers could start to earn more money in 2015. Average hourly wages jumped by 0.5 percent in January, the best month over month increase since November 2008. The 12-month increase at 2.2 percent, which is close to a post-recession high. While the gain still lags the 3 to 3.5 percent raises that employees usually earn during recoveries, with inflation running low, even the small increase could help Americans feel more financial secure.

Of course economists are hopeful that with that with their new-found dough, Americans will go on a spending spree and spur additional economic growth. The data have been mixed on that front, though. Although consumer spending jumped by 4.3 percent in the final three months of last year, it looks like it slowed down in December. This caused some concern among analysts, who are worried that consumers were not willing to (gasp!) spend freely.

If I may don my CFP® cap for a moment, I don’t think it’s the worst thing in the world if more Americans were inclined to save, especially after the painful lessons of the recession. The trade-off between the economic recovery suffering a bit at the expense of households strengthening their balance sheets would seem to be a good one over the long term. Time will tell whether or not people will return to the great American pastime of spending, but for now, wage increases should improve both consumers and the economy this year.

Meanwhile, there seemed to be a lot of hand wringing over gas prices (finally) rising last week. The Energy Information Administration's weekly survey showed the U.S. average regular retail gasoline price increased for the first time in 18 weeks. Wait, wasn’t the massive drop in oil and gas prices a sign that the global economy was headed into the abyss? Not so fast, according to Capital Economics, whose analysts say “The recent pick-up in oil prices has the potential to develop into a Goldilocks’ scenario: prices high enough to keep most oil producers in business, but low enough to provide a substantial boost to global economic activity.”

Finally, there were two stories about identity theft last week and we covered both of them on CBS This Morning: “Anthem Health Insurance Data Breach” and “TurboTax Halts and Resumes Filing of State Returns”. Check out this post to learn “How to Guard Against Identity Theft”

MARKETS:

• DJIA: 17,824, up 3.8% on week, up 0.01% YTD (biggest weekly % gain since Jan 2013)
• S&P 500: 2055, up 3% on week, down 0.2% YTD
• NASDAQ: 4,744 up 2.4% on week, up 0.2% YTD
• Russell 2000: 1205, up 3.4% on week, up 0.1% YTD
• 10-Year Treasury yield: 1.94% (from 1.68% a week ago; largest one-week increase since June 2013)
• March Crude Oil: $51.69, up 7.2% on week, biggest weekly % gain since Feb 2011
• February Gold: $1,234.60, down 3.5% on week
• AAA Nat'l average price for gallon of regular Gas: $2.17 (from $2.05 week ago, $3.27 a year ago)

THE WEEK AHEAD:

Mon 2/9:

Hasbro

Tues 2/10:

Coca-Cola

9:00 NFIB Small Business Optimism Index

10:00 Job Openings and Labor Turnover Survey (JOLTS)

Weds 2/11:

AOL, Cheesecake Factory, Cisco, Panera, Pepsi, Time Warner

Thurs 2/12:

CBS, Kellogg, Kraft, Zynga

8:30 Weekly Jobless Claims

8:30 Retail Sales

10:00 Business Inventories

Fri 2/13:

8:30 Import/Export Prices

10:00 Consumer Sentiment

Oil Plunge and Janet’s “Considerable” Dilemma

Considerable adjective: large in size, amount, or quantity “Considerable” is the word of the week, as all eyes move from plunging oil markets to the Federal Reserve. This week, central bank officials gather for their last policy confab of the year. With bond buying now done and the economy expanding, the big question is: how might the Fed alter its policy statement to prepare investors for the inevitable increase in short-term interest rates?

Previously, the Fed has said that it would leave rates at near zero for a “considerable time,” but with the labor market improving and the economy gaining strength, there’s a case to be made to shift that language to a word of phrase that might equate to a shorter period of time. Analysts at Capital Economics have turned back the clock by a decade to see what terminology officials’ used ahead of the tightening cycle that began in 2004. “Back then the Fed went from saying that low rates would be maintained for a ‘considerable period’; to the FOMC would be ‘patient’ in removing accommodation; and then to accommodation will be removed at a ‘measured’ pace.”

Here’s how the Fed’s words translated into time:

• Considerable: 6 - 10 months
• Patient: 2 - 5 months
• Measured: one month

OK, so remember back in March when Fed Chair Janet Yellen had that woops moment at her first presser? That’s when she let it slip out that the Fed would raise rates “something on the order of around six months” after QE ended. Since QE concluded at the end of October, something on the order of six months would bring us to April 2015. Conveniently, there is a policy meeting on April 28-29, 2015 so that might be a fine time to start the process.

HOLD YOUR HORSES! The recent acceleration of the oil market sell-off may put a wrinkle on the “considerable” to “patient” exchange. While the 46 percent drop in crude oil from the June highs amounts to about $100 per month savings for US consumers, there are some analysts who believe that crashing oil is the canary in the coal mine for the global economy.

Until the last week or so, most have thought that the oil story was one part increased supply and one part tepid demand, but what if the balance is tipping in the wrong direction? In that case, falling oil has more to do with a big slow down in Chinese, European and Japanese economies than with the growth of U.S. production. In fact, that weakening growth prompted OPEC to predict that demand for its oil will hit a 12-year low next year.

If the world is really slowing down, then can the U.S. remain an outlier of growth for much longer? Investors answered that question with a “NO WAY” last week and sold stocks to underscore the point. After all, if you’re sitting atop healthy gains for the year (the S&P 500 is still up 8.3 percent YTD) and you think the globe is slowing, a reasonable response is to lighten up on your equity positions and see how things unfold. The Federal Reserve may also opt to maintain the status quo on its wording, at least until the first meeting of 2015.

MARKETS: The Grinch stole the Santa Claus rally, at least for a week! Despite seeing the worst week of 2014, the S&P 500 remains within 4 percent of its all-time high.

• DJIA: 17,280, down 3.8% on week, up 4.2% YTD (worst week since Sep 2011)
• S&P 500: 2075, down 3.5% on week, up 8.3% YTD (worst week since May 2012)
• NASDAQ: 4653, down 2.7% on week, up 11.4% YTD
• Russell 2000: 1152, down 2.5% on week, down 1% YTD
• 10-Year Treasury yield: 2.08% (from 2.31% a week ago)
• January Crude Oil: $57.81, down 12% on week (lowest close since May 2009; down 46% from June peak)
• February Gold: $1,190.40, up 2.7% on week
• AAA Nat'l average price for gallon of regular Gas: $2.56 (from $3.24 a year ago)

THE WEEK AHEAD:

Mon 12/15:

8:30 Empire State Manufacturing

9:15 Industrial Production

10:00 Housing Market Index

Tues 12/16:

8:30 Housing Starts

FOMC Policy Meeting begins

Weds 12/17:

8:30 Consumer Price Index

2:00 FOMC Policy Decision/Statement

2:30 Janet Yellen Press Conference

Thurs 12/18:

8:30 Weekly Jobless Claims

10:00 Philadelphia Fed Survey

10:00 Leading Indicators

Fri 12/19:

10:00 State Unemployment

10:00 Kansas City Fed Manufacturing