State of the Stock Market Analysis for the Week Ending December 20th, 2015 (Stock Market Wild Card Still to Come 12-20-15) All You Need Is Jobs

It was one of those weeks that we have not seen in quite a while. The Federal Reserve raised interest rates by a quarter point, marking the first interest rate hike by the Fed in more than nine years. The stock market rallied after Wednesday’s Fed announcement, and for a brief moment, all was well. Janet Yellen and the various Fed Heads had clearly communicated that a rate hike was on the way, and 90% of strategists were in agreement that a rate hike was going to happen on Wednesday. When the rate hike came, bulls were pleased to see the late-day rally in the stock market. Then we saw “reality” set in on Thursday and Friday, as investors realized that a rate hike is still a rate hike, and the stock market acted accordingly.

Bulls had been hoping for a Friday bounce from Thursday’s selloff, but that was not in the cards. The Santa Claus Rally had been grounded, and stocks sold off sharply on Friday straight into the close. On Friday alone, the Dow was down 2.1%, the Nasdaq was off 1.6%, and the S&P 500 ended 1.7% lower. It was a tough way for the bullish camp to end the week, but overall, despite Friday’s slide, the major indices did not look all that bad for the week. Weekly declines amounted to 0.8% for the Dow, 0.2% for the Nasdaq and 0.3% for the S&P 500. While it was not all that bad of a weekly performance, Thursday and Friday were still a holiday bummer for the bulls.
The leading culprits for the stock market’s decline were the continued weakness in both the oil and high-yield bond markets. Oil fell another 1% on Friday alone, and Intermediate Crude closed out at $34.55 per barrel. Declining oil prices are wreaking havoc on the American shale oil business, and many of those companies are having a hard time. These hard times are causing rigs to close, and balance sheets to weaken. This is putting pressure on energy-related, high-yield bonds, which in turn, is helping weigh heavily on the junk bond market. As usual, where there is smoke, there is usually fire, and this development is causing a big pullback in the broader high-yield market.
Throw in the new development of rising interest rates from the Fed, and you can see why investors are suddenly nervous. Falling oil prices suggest that global GDP might be declining, which is also another factor that might be causing this recent selloff in stocks. There is talk of oil tankers unable to unload crude at ports, and there is even talk of tankers turning around with their oil and going home. Even with falling oil prices, oil is not being used, and that is an ominous sign for global GDP. Falling commodity prices also signal that all is not well with the global economy.
This scenario is what makes the Fed’s rate hike so worrisome. The Fed has been wanting to “normalize” interest rates for years, and the near-zero rates are apparently coming home to roost. Low rates have allowed a lot of debt to be issued that would not likely have been issued in a higher-rate environment. Rising interest rates and a slowing global economy are the last thing high-yield debt owners would want to see, but that is exactly what is occurring. U.S. shale oil companies took on a ton of low-interest debt, and the decline in the price of oil is squeezing the oil shale business dramatically. Just as in 2007-2008, other dominoes could soon be caught in the fray, and that had investors very nervous this past week.
So the buzz this week was about what happens when the Fed “begins” an interest rate hike cycle. That is both good news and bad news. It might be good news for savers and money market holders who now earn close to zero, but historically it leads to trouble. The past two rate hike “cycles” occurred before the “dot-com” tech bubble crash in 2000, and before the housing bubble crash of 2008-2009. Whatever “bubble” we might currently be in (like high yield or oil shale) might already be reacting to this new rate hike cycle. The problem with rate hikes is that they do not tend to stop until something breaks, and this puts the Fed in a tough spot since it only raised rates by a quarter point on Wednesday.
Yes, the Fed could cut rates now that it raised them, but rates are still near zero. The Fed has a tendency to stay on course when it moves in one direction, so any kind of reversal in the near future could rattle markets worse than the rate hike from Wednesday. Rates had to rise, and even Ben Bernanke has said that rates near zero were an emergency measure to get the economy through the 2008-2009 economic crisis. That is a long time for rates to have remained at or near zero, and we are now seeing the negative side of that policy unfold. There is a lot of bad debt that probably should never have been issued, but that is what happened. We will keep a close watch on the high yield market and oil, and hopefully, we can see the “Great Unwind” toward normalized interest rates not cause too much damage.
That said, we are still in December, and if Santa can get Rudolph the Red-Nosed Reindeer on board, maybe the stock market can get through this storm and finish the year strong. This is the sweet spot for historical stock market performance, which was why this past week was so disappointing for the bulls. The Gorilla wishes each and all a relaxing December weekend, and he also wishes a Happy Holiday season to all as well. A year-end bounce could be in the cards, so stay tuned as we head into the next week’s holiday-shortened week that should be relatively calm and quiet. Have a great weekend and we will be back in action on Monday!

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