It was a wild week for global financial markets, as oil plunged to a 13-year low, European and U.S. banking stocks melted down, and the major indices dipped below their late-August lows. Bulls had been looking for support and a bounce at the August lows, but the majors blew straight past those levels on Thursday. It was an ugly breakdown from a technical standpoint, and it looked as though we were about to experience a major market collapse. The Dow was down by more than 400 points on Thursday, but stocks somehow rallied at midday and closed negative, but well off their lows of the day. The late-day lift set the tone for Friday’s surprising moonshot rally, and the week ended up not being all that bad.
Thursday’s worries gave way to Friday’s “big sigh of relief,” as oil surged more than 10% higher and the Bank Index (BKX) rose 5.4%. There was some talk that the market’s rise was the result of short-covering, but there were few bulls complaining about a robust rally that pushed the Dow up 2.0%, the Nasdaq up 1.4% and the S&P 500 up 1.9% for the day. For the week, however, the Dow was down 1.4%, the Nasdaq was off by 0.6%, and the S&P 500 was 0.8% lower. All of the thrills and chills we saw this week came without much input from the Chinese, as its stock market was closed all week for the Chinese Lunar New Year. It will be interesting to see how Chinese markets react on Monday.
The week’s big concerns revolved around the decline in the price of oil, and the buzz was that the price slide was proof that the global economy might be drifting towards recession. In addition, the failure of Russia, Saudi Arabia and Venezuela to come to an agreement on production cuts had also driven down the price of oil. However, rumors of cooperation between these oil producers helped send oil prices soaring on Friday. Saudi Arabia knows that with oil down around the $30 per barrel level, many U.S. oil companies will simply decrease production. North Dakota and other shale regions in the U.S. have been hit very hard by the low price of oil, so in a sense, the closing of rigs in the U.S. is clearly lowering global production levels.
Also in the spotlight this week was Federal Reserve Chief Janet Yellen, who testified before congressional committees and answered a lot of questions from lawmakers. Yellen appeared on Capitol Hill on Wednesday and Thursday, and the tone of the questions from congressmen was fairly harsh. It is hard to remember when politicians from both parties hammered so hard at the Fed and its policies. There were biting questions about the Fed bailing out the “too big to fail” banks, and there were also tough questions about whether a zero interest rate policy (ZIRP) could give way to a negative interest rate policy (NIRP) as we now see in Japan and Europe.
Critics of negative rates say that they are not working in Japan, nor are they working in Europe, and the last thing the U.S. needs right now is to follow policies that are clearly not helping the economies in Europe or Japan. We are hearing news of more financial problems in Greece, which shows that years of the ECB’s and Mario Draghi’s rate cuts and Quantitative Easing (QE) have not cured the EU’s ills. European stock markets did get a bounce on Friday, though, so the EU has some time to think over the weekend on strategies. Once again, critics of all of this central bank action think that there is a risk of financial markets losing all faith and trust in central banks around the globe.
Overall, Yellen did an adequate job, but she did have a rough time defending the Fed on all of the “big bank” bailouts and policies (post-Lehman) that Ben Bernanke and his crew set in motion while Janet was still a professor at U.C. Berkeley. Many of those programs were not exactly “Economics 101,” and many had never been attempted. Central banks have their work cut out for them in the weeks ahead, and as long as global financial markets remain fairly stable, this challenging time should pass. If oil prices and banks turn sharply lower again next week, and if China comes back Monday in a bad mood, then things could get challenging in a blink.
As for U.S. economic news, we continue to see mixed messages. On Friday, the University of Michigan released its Consumer Sentiment number for January, and it came in at 90.7. That was below both December’s 92.0, as well as below the same 92.0 that was expected for January. Retail sales for January rose 0.2%, which was equal to December’s 0.2% rise, but actually a tad higher than the 0.0% that economists had expected. So once again, we get a mixed round of economic numbers that are not so hot, and yet, they are not so cold either. The Fed has said that it will remain “data driven” concerning its interest rate decision for March, but with this kind of “data” and a big stock market correction of more than 10%, a Fed hike in March seems remote at best.
We did get that Friday bounce in the stock market, and it was a great way for the bulls to head into the weekend. The New Year has been tough for investors, and it will likely continue to be a challenge. The S&P 500 closed on Friday at 1,864, and that is slightly below its August 24 intraday low of 1,867. From a technical perspective, if 1,867 can turn into support on Tuesday instead of a resistance level, then we could see the foundations for a strong rebound. That said, the Gorilla wishes each and all a relaxing winter weekend, and we will be back in action Tuesday, after the President’s Day on Monday. Stay tuned as next week will be very telling in terms of what we can expect for the rest of the year. Again have a great weekend!
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