It was not a Black Friday, but it was dark enough to have investors fretting as we headed into the weekend. We have become so accustomed to having late-Friday rallies that calm investors’ nerves. Closing out the week with a Dow off by more than 300 points was definitely disconcerting. Friday’s vibe was quite different from last week’s, when the Dow and S&P 500 had hit all-time highs. Bulls were singing and dancing last week, but this week certainly closed out with a more ominous tone. Stocks faded and fell throughout the session, and they closed at their lows for the day, with the Dow off 1.8%, the Nasdaq down 1.2% and the S&P slipping 1.6%.
For the week, we saw losses of 3.8% for the Dow, 2.9% for the Nasdaq and 3.5% for the S&P 500, and from a technical standpoint, some damage was definitely done. The Dow is now below its 50-day moving average of 17,280, and the S&P 500 is below its 50-day moving average of 2,020, so the key is for these levels to hold if we are to get a bounce next week. The Nasdaq’s 50-day moving average is at the 4,631 level, so it was a plus to see the Nasdaq hang tough into Friday’s close. The major indices are still holding on to year-to-date gains of about 4.5% for the Dow, 11% for the Nasdaq and 8.5% for the S&P 500, though, which was something to keep in mind after this rough and tumble week.
Oil prices were the main culprit in this week’s declines, and we saw light sweet crude fall by another 4% on Friday, bringing the weekly decline to a hefty 12%! There is no clear reason for the slide, and because there is no clear reason, it is likely why global financial markets are reeling. High-yield bonds have been under a lot of pressure, and we are seeing a huge “flight to quality” that sent the yield on the 10-year Treasury down to 2.1%. This week’s action was all the more surprising because after a six-plus-year old bull market, many investors have forgotten that prices actually do go down sometimes. The10% rally from the mid-October decline was so fast and furious that it made most of us quickly forget the 10% early-October slide.
What was interesting on Friday was the stunning University of Michigan Consumer Sentiment Report that came in at 93.8. Economists were looking for an 89.6 reading, and that was up from November’s 88.8. Consumers are in a great mood, and December’s number showed that sentiment is at its highest level since January of 2007. We all know what happened in the subsequent years that followed 2007, which is why many investors were not overly thrilled at seeing consumers in such a great mood with regard to Friday’s sentiment numbers. Stock market plunges have a way of deflating consumer confidence, so we will have to wait and see if the new market uncertainty has an impact on consumer psychology.
Economists are quick to note that we did see a big decline in oil prices in the summer of 2008 ahead of the Lehman meltdown and the bursting of the housing bubble. Whether this current oil price decline is a warning of economic troubles ahead remains to be seen, but the ongoing fall in oil prices is getting the attention of global stock and bond markets. We are still just a week away from all-time highs in the Dow and the S&P 500, so the mainstream press has really not yet focused on the dramatic fall in oil prices, nor has it put the spotlight on the weakness in the high-yield (junk) bond market as well.
The near-zero interest rates courtesy of the Federal Reserve helped finance a lot of high-yield debt at attractive rates, and the concern is that loads of that debt are in oil-related endeavors. With oil down nearly 50% from its June highs, some of this debt might be getting squeezed right now, and that could be having a spillover effect to the broader high yield marketplace. There are a lot of unknowns right now, and when you throw in the October fears of a global GDP slowdown, you can see why we are seeing fear levels soar across many asset classes.
The Volatility Index (VIX) topped 23 on Friday, before closing out the session at just over 21, so it is clear that fear levels have come back in a big way. The trailing off we saw in the stock market that left it at its low of the day on Friday has set us up for a challenging week ahead. The Federal Reserve meets next Tuesday and Wednesday, so the spotlight will be on Janet Yellen and whatever the Fed has to say regarding Fed policy. With the price of oil and the stock market under pressure, it should make for an interesting week.
Bulls will be hoping for a bounce and a resumption of the Santa Claus Rally next week, and maybe we can put this tough week behind us. The Gorilla wishes each and all a relaxing December weekend and a happy holiday season. There are a lot of “wild cards” out there right now, so you can bet that the bulls will be looking for some calmer heads to prevail as we wind up the final couple of weeks of 2014. Again, have a great weekend, and we will be back in action on Monday!