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Weekly Vantage Point | 12.14.15

 
Equities End Week Sharply Lower

December 14, 2015 – U.S. stocks fell sharply on Friday, with the S&P 500 capping its worst week since late September, as investor optimism about the economy faded ahead of this week's December 16 Federal Reserve interest rate decision. Energy companies slumped the most as crude oil futures closed at lows not seen since 2009, renewing deflation concerns. Financials fell the most since the week of August 21 as the expected shift in monetary policy hurt asset managers amid a rout in high-yield corporate bonds. Besides concerns over a looming rate hike, non-investment grade corporate bonds are also suffering under expectations that defaults could accelerate for energy and commodity producers.

Among key economic releases last week, wholesale inventories declined 0.1% in October, yet year-over-year (YoY) inventories are rising way ahead of sales. Inventories are up 3.6% YoY, while wholesale revenues are down 3.7% over the past 12 months. Weak oil prices together with the strong dollar are keeping international trade prices depressed, with November export and import prices falling 0.6% and 0.4% respectively. Lastly, retail sales rose 0.2% last month, shy of forecasts, while sales excluding auto and gas revenues rose 0.4%, 0.1% above economists' consensus forecast.

For the week, the S&P 500 fell 3.74%, ending at a two-month low that curtailed a three-week bullish trend. The Dow Jones Industrial Average lost 3.26% and the NASDAQ Composite slumped 4.04%. All ten major sector groups ended in negative territory, with Energy (-6.40%), Financials (-5.33%) and Materials (-4.07%) suffering the largest losses. Utilities (-1.67%) and Consumer Staples (-1.95%) fell the least. West Texas Intermediate (WTI) crude oil ended at $35.62/barrel, capping its sixth weekly decline, plunging 10.9% last week and is down 25% since Halloween weekend. The CBOE's VIX Volatility Index, a measure of investor anxiety, surged 65% last week, including a 26% jump on Friday. Treasuries advanced last week, with the yield on 10-year Treasury notes falling 14.2 basis points to finish at 2.128%.

 
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Week’s Economic Calendar
 

Monday, December 14: No major releases;

Tuesday, December 15: FOMC meeting begins, Consumer Price Index, Empire State Mfg., Housing Market Index;

Wednesday, December 16: Housing Starts, Industrial Production, PMI Mfg. Index, FOMC Interest Rate Decisions, Forecasts at 2:00 pm EST and Fed Chair Press Conference at 2:30 pm EST;

Thursday, December 17: Jobless Claims, Philly Fed Business Outlook;

Friday, December 18: PMI Flash Services Index, Kansas City Fed Mfg. Index.

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Market Watch
Stocks 1-Wk MTD 3-Month YTD 1-Year
Dow Jones -3.26% -2.57% 5.06% -3.13% -1.88%
S&P 500 -3.74% -3.19% 3.17% -0.27% 0.96%
NASDAQ -4.04% -3.41% 2.61% 5.34% 6.01%
Russell 3000 -3.90% -3.60% 1.94% -1.11% 0.39%
MSCI EAFE -2.39% -2.91% -0.41% -2.38% -3.03%
MSCI Emerging Markets -4.75% -4.98% -3.34% -17.31% -16.26%
Bonds 1-Week MTD 3-Month YTD 1-Year
Barclays Agg Bond 0.47% 0.29% 0.50% 1.17% 1.37%
Barclays Municipal 0.51% 0.517% 2.29% 3.17% 3.28%
Barclays US Corp High Yield -2.35% -2.57% -5.25% -4.52% -3.53%
Commodities 1-Week MTD 3-Month YTD 1-Year
Bloomberg Commodity -4.01% -3.27% -11.79% -24.80% -29.13%
S&P GSCI Crude Oil -6.81% -10.56% -17.32% -30.07% -38.13%
S&P GSCI Gold -0.77% 0.98% -2.50% -9.15% -12.24%
Source: MorningStar
Chart of the Week: Oil Pessimism Intensifies After Latest OPEC Meeting
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View larger image »
 

Source: OPEC, JP Morgan

At its December 4 meeting, OPEC maintained oil production at its current level of 31.5 million barrels/day. While largely expected, the move effectively removes the ceiling on OPEC production, thereby increasing production in the midst of a global supply glut. OPEC's strategy over the past 18 months has been to maintain market share at the expense of other non-OPEC producers, namely U.S. shale players, and ultimately price them out of the market. With both U.S. and OPEC production increasing, more pain should be felt in the energy sector. However, given OPEC's persistent strategy, there have been signs of future waning production in the U.S. as companies scale back on replacement capex (infrastructure investment) and as active rig counts continue to decline. Inevitably, these measures will lead to less output in the longer term, with agencies such as the EIA and IEA expecting U.S. production to decline by 0.5 million barrels/day and demand increasing by 1.6 million barrels/day in 2016. Energy-related securities in both equity and fixed income markets will likely experience pain in the near term, but value may be found in companies with low debt levels, efficiencies of scale, and strong balance sheets who can successfully manage through the current low price environment.

 
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