Bulls had been hoping for a Friday bounce, but that was not in the cards to wrap up what turned out to be a tough week in the stock market. Falling oil prices and sinking high-yield bond prices weighed on investor sentiment, and we closed out Friday with stocks sharply lower. On Friday alone, the Dow was down 1.7%, the Nasdaq was off by 2.2%, and the S&P 500 was 1.9% lower. The weekly performances for the major indices were not-so-great, as the Dow was off by 3.3%, the Nasdaq was down a whopping 4.1%, and the venerable S&P 500 was down by 3.8%. It seems that the Santa Claus Rally is temporarily on hold, and most bulls are hoping for a bounce next week.
A bounce next week might be a challenge, though, especially with the Fed in “interest rate hike” mode. The Fed is in a precarious position right now, and the decline in the price of oil and the apparent high-yield bond meltdown are raising the stakes for the Fed’s interest rate decision next Wednesday. The price of West Texas Intermediate crude fell 3.8% on Friday, which put its price at $35.35 per barrel; a multi-year low. Whether this is reflecting a global economic slowdown or something bigger remains to be seen, but the Friday decline in the price of oil clearly weighed on investors’ nerves.
High-yield or “junk bond” prices are also in a nosedive, and that also has equity investors worried. Price levels of many high-yield indices and funds hit their lowest levels since July of 2009, and one “bond king” (Jeff Gundlach), said it was eerily reminiscent of 2007. Third Avenue Management even closed off withdrawals from one of its high-yield debt funds. Seeing high-yield falling apart is very similar to the problem that Bear Stearns experienced with a couple of its funds back in 2007, so the question is whether this sort of high-yield, downside action is a precursor to more problems ahead. The downturn in the high-yield bond market presents Janet Yellen and the Fed with a backdrop that could make a rate hike difficult.
With nearly 80% of strategists predicting a rate hike by the Fed next week, it might upset financial markets if they backed off a rate hike. Yellen has her work cut out for her since she and her team have all but guaranteed a rate hike. The Fed decision has suddenly morphed into a “damned if you do, damned if you don’t” scenario. This past down week for stocks felt a whole lot more like October than a typical December, and it is amazing that “markets” like oil and high yield are voting strongly ahead of the highly-telegraphed Fed rate hike that is supposed to take place on Wednesday.
Economic numbers still support a Fed rate hike, though, and we saw the University of Michigan Consumer Sentiment report rise to 91.8 versus last month’s 91.3. Economists were looking for a 92.0 reading, but the 91.8 shows that consumers are still feeling good. Retail sales for November increased by 0.2% versus the expected 0.2%, which was a positive, and sales were up from October’s 0.1% increase. These numbers support a Fed rate hike next week, but again, declining oil prices and the weakness in junk bonds are cause for concern. The stock market decline this week did not exactly help the bullish camp that much either.
So next week is a big week for Janet Yellen and the Fed, and we all know that most Fed Chairmen are often tested by fire early on in their reign. Next week could be Janet’s week for a test, and it will be interesting to see what the Fed does, especially given the overwhelming consensus that a rate hike is on the way. More telling than interest rates moves will be the Fed’s actual comments on the current state of affairs in the financial markets. December is supposed to be a quiet and upbeat time for financial markets, and it is surprising to see a plunging stock market and an important Fed meeting at this time of year.
That said, the Gorilla wishes each and all a relaxing December weekend. The Gorilla caught financial writer Michael Lewis on Steven Colbert’s show this week, and the movie “The Big Short” based on Lewis’s book is out this week. It debuts nationwide on December 23rd, and it focuses on a small group of investors (hedge fund guys) who saw the housing bubble of the last decade (2008) and shorted it. The book is fascinating, and Lewis is a great writer that can explain a complex topic and make it entertaining, understandable and informative. A couple of big names like Brad Pitt and Steve Carell are in the movie, and apparently Lewis says that the movie hits a home-run in taking his book to the big screen. Again, we hope you had a great weekend!
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