Finance, Insights

Oil Doing the Limbo

PaulNolte-2If the old Wall Street saw is true that the first week of the year is indicative of the year as a whole, it will be a wild ride. Even the economic data left many scratching their heads. The always over analyzed employment report had something for everyone. Average monthly job growth for the year 2014 was the best since 1999. The average length of unemployment has been falling steadily and is now half of the worst levels in 2010. However, the 12.6 week average is still well above any time in the past 50 years and slightly above the prior peak in 1983. Wages, instead of rising, actually fell in the last report. Wages growth is now among the slowest in the past 40 years. Conventional thinking, (which changes frequently!) is that the Fed will be on the sidelines for much longer than just until mid-year. The Chicago Fed Chief Charles Evans implied in a speech last week that the Fed needs to be very patient in raising rates and would not suggest doing so before 2016. That “positive” news stemmed the early week declines and for a brief moment pushed the markets into positive territory for the year. However, after Friday’s employment release, analysts are heading back to the drawing board and reworking their estimates for 2015 economic growth and just when (if ever) rates will rise in the US.

Until Evan’s comments mid-week, the markets were keying off weak energy prices and the specter of more problems in the Eurozone. Will Greece finally be forced out? Will Europe embark upon a US style monetary easing policy? Are they close to deflation? Few answers could be proffered, so investors sold first and worked on answers later. Worries about a changing monetary policy in the US were swept away on Wednesday and investors bought, not wanting to miss out on another rally to new all-time highs. Corrections over the past year have been extremely rapid and harsh. But the recoveries have been just as quick – carving out a “V” shape when looking at the price action of the markets. Investors are learning the “new” corrective pattern and are now jumping in even quicker as prices decline. As some point a market decline will morph into a real correction of 10%. Investor sentiment has been swinging very quickly from bullish to bearish and back again. There will come a time that selling will no longer beget buying. When and how that occurs are the billion dollar questions. Expectations remain very high that the Fed will maintain support of stock prices…period.

As reports from Europe indicate the increasing likelihood of a US style monetary easing and worries over falling prices, the US bond market is once again the beneficiary of worried investors. Global investors continue to favor US treasuries, a relative calm in the global storm. Corporate bonds, especially high yield bonds, have suffered some from falling energy prices. Worries about bankruptcies in the sector are also pushing investors toward the safety of treasury bonds. The stump speeches from Fed officials also lend credence to a still low interest rate environment in the US. Finally, inflation, even without the help of dropping energy prices remains below historical ranges. This should allow the Fed to be verrryyy slow if/when they start to increase interest rates.

Reviewing the industry groups and major asset classes, little has changed over the past few weeks. Upward momentum for the stock market seems to be waning, however the declines have not registered as much “negative” as past declines. International and commodity prices cannot get going, so REITs, large and small US and bonds remain the asset classes of choice. The SP500 has been little changed over the past two months and within the industry groups, healthcare and interest rate sensitive utilities have led, while the more economically sensitive energy and basic materials have lagged. It is because of the weakness in the economically sensitive groups that give credence to the belief that the global and maybe even the US economies are not as strong as many believe. If that is indeed the case, earnings season that begins this coming week, could be a harbinger of rougher times ahead.

The economic data seems to be strong enough to worry about higher interest rates, but looking below the surface the data looks weak. The stock market is likely to remain volatile as investors decipher the economy and upcoming earnings reports. Bond investors are likely to sail through the rough stock market waters much easier. Our best guess is that rates are not increased until fourth quarter at the earliest.

The opinions expressed in the Investment Newsletter are those of the author and are based upon information that is believed to be accurate and reliable, but are opinions and do not constitute a guarantee of present or future financial market conditions.