State of the Stock Market Analysis for the Week Ending January 24th, 2016 (Stocks Have Rough and Tumble Week 1-24-16)
Friday’s bounce in oil prices put investors in a good mood, and some strong housing numbers added to the day’s optimism. It was one of those days that bulls love, and it was one of those days that say a real “reversal” might be in place. We had been flirting with an official correction for the major indices, as they were down toward correction levels of 10% each. The bounce we saw on Friday ended with the Dow up 1.3%, the Nasdaq up 2.6% and the S&P 500 up 2.0% for the day, and the bulls headed into the weekend celebrating that maybe the tough start to 2016 was finally behind us. Next week will be challenging, but for the time being, the selloff of 2016 has finally bounced.
The harrowing low at midday on Wednesday reversed, and the week closed out on an extremely positive note. One Morgan Stanley strategist even chimed in that the market had already priced in several rate hikes by the Fed, even without the Fed having to raise interest rates. The declines we have seen in January have been sharp, but the bounce that we witnessed late in this past week is encouraging. A continued market rise might even give the Federal Reserve the confidence to raise rates one more time, but we will have to wait and see how that scenario ultimately unfolds. The Fed is in a tough spot, and it most likely does not want to do anything that would rattle financial markets any further.
Oil prices have been in the spotlight for the past few weeks, and seeing the price of oil fall to a 12-year low helped create a “mini-panic” in global financial markets. Having the price of oil spike back up by around 9% on Friday alone quelled fears of an oil price collapse, which helped back the solid ending we saw for the week for U.S. stocks. There were comments that the oil spike was the result of short covering, but it was still interesting to see Friday’s sharp spike. Volatile energy markets will likely continue in the weeks and months ahead, but at least for the time being, oil prices have reversed.
The stock market bounce we saw from the Wednesday lows occurred without much fanfare from central banks, and that is definitely a positive. Yes, the ECB and the Bank of Japan keep hinting at more Quantitative Easing (QE). And yes, our own Fed seems to be backing off from its recent hawkishness, but the bounce we saw in stocks was real. Strong numbers on existing home sales for December also helped create a positive backdrop for the economy, which seems to help give buyers a reason to step back into the stock market in a big way.
The question now is whether Friday’s bounce can continue into next week. As long as the price of oil can hold its current level, and as long as we can see earnings season play out well, then the stock market rebound should continue. It has been a long time since we have had a correction, and so far, the stock market has successfully “re-tested” its August 2015 lows. It is an aging bull market, though, so that adds a lot of pressure to this past week’s bounce. Corrections of 10% are often healthy for the stock market, and maybe this is one of those “normal” occurrences that will keep this stock market intact.
We have become so accustomed to the Fed and the ECB stepping in when things look bleak, that it is hard to see how central banks can “step in” like they did for the past eight or so years. This is why the U.S. Fed is attempting to “normalize” interest rates with its December rate hike. How the Fed now reacts to a financial crisis is troublesome, especially since it only hiked rates by a quarter point from essentially zero. Will a quarter-point rate cut from a quarter point really work all that well at this point? Probably not, so we should just hope that the economy continues to improve.
There are still concerns about potential “global shocks” that could rattle financial markets, but those worries still seem to be on hold. We have gone a long time without news on Greek defaults, or the meltdown in the EU, so that is a plus. We have also seen a somewhat calm the Middle East, which is also a plus. Even China has been somewhat quiet in terms of financial news, although we do keep hearing about China’s slowing economy. This makes for a challenging 2016, and we are only in the early part of the year, so keep those seat belts fastened tightly.
The Gorilla wishes each and all a relaxing weekend, and if you are on the East Coast, be careful as the snow hits hard. There is some pretty good football this weekend, so maybe that is the best way to hunker down, stay home and avoid the storm. We will be back in action on Monday, so again, a wonderful weekend to all!
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