For the week ending November 20, 2015, robust gains in the equity markets helped offset nearly all the losses of the prior week and brought the year-to-date return of the S&P 500 back into positive territory. For this past week, the Dow rose 3.35 percent; the S&P 500 rose 3.27 percent. In other news: expect at least three rate hikes in 2016; brace for a wave of debt defaults by oil companies; and, terrorist attacks may pose a risk to Europe’s economic growth. Below is a recap of the markets for each day of the week.
The markets were up on Monday despite terrorism in Paris and a downbeat economic report from the Empire State. Oil rose $1 to $43. The Dow rose 1.4 percent to 17,482; the S&P 500 rose 1.5 percent to 2,053.
On Tuesday, the markets were mixed after a soccer match in Germany was cancelled due to a bomb threat, and strong economic news (industrial production, consumer prices). Oil dropped $1 to $42. The Dow rose fractionally to 17,489; the S&P 500 dropped 0.13 percent to 2,050.
The markets rose on Wednesday on mixed data from housing starts and greater certainty of a rate hike from the FOMC minutes. Oil remained flat at $42. The Dow rose 1.3 percent to 17,720; the S&P 500 rose 1.62 percent to 2,084.
The markets dropped fractionally on Thursday despite good economic news (weekly jobless gains, Philly Fed manufacturing index). Oil is under $42. The Dow dropped fractionally to 17,732; the S&P 500 dropped -0.11 percent to 2,081.
On Friday, the markets rose despite a terrorist attack in Mali. Oil dropped $1.50 to $40.39. The Dow rose 0.5 percent to 17,823; the S&P 500 rose 0.38 percent to 2,089.
Despite attacks by terrorists in France and Mali this past week, the markets pushed higher. Investors were buoyed by Fed remarks that the U.S. economy is showing strength, and by the ECB’s willingness to ease monetary policy further. After a series of poor reports from retailers in the prior week, updates from other stores and chains this past week were more positive, with Nike posting a dividend hike on Friday.
Chief economist from Renaissance Macro said Friday that investors need to brace for at least three rate hikes in 2016. Economist Neil Dutta told CNBC “I think in 2016, we’re going to have the unemployment rate below 5 percent and headline inflation will be close to 2 [percent]”. “Underlying inflation dynamics are moving in a direction that’s going to pressure the Fed towards a more aggressive path than the markets are pricing in at the moment.” “I think the Fed is going to go at least three times next year; if not four. That’s what they mean by ‘gradual'”, said Dutta. The market expects the Fed to start hiking rates in December; if this does not occur, it will likely be perceived as a negative.
Oil companies will default on debt loans due to low oil prices. Many oil and gas companies have large debt loans and could start defaulting at alarming rates. Moody is forecasting an increase in defaults in the energy sector which has 79 defaults this year so far. The strain on oil and gas companies came after years of increasing debt when oil prices were over $100 per barrel for WTI; oil prices are now near $40 per barrel which has caused a cash flow crunch. Among the major banks reporting rising defaults by energy companies include Wells Fargo, Bank of America, and JP Morgan Chase.
Terrorist attacks may pose a risk to Europe’s economic growth. As terrorist threats worsen in western Europe, economic growth could be impacted, says rating agency Standard & Poors last Thursday. Terrorism could impact negatively on economic growth by depressing consumer and investor confidence; and, tourism will then take a hit which will then affect aviation and certain services industries. The European economy is currently weak, and terrorism will only further aggravate this weakness. Under consideration by the EU is imposing border restrictions to hamper the free flow of terrorist from one EU country to another. Such border controls will only add to the cost of doing business in the 26 EU countries.
The bottom line: excluding problems in the global economy and a disastrous employment report in November, the Fed is likely to raise rates in December beginning at the release of the FOMC minutes. Globally, the increased certainty of a Fed rate hike in December, coupled with the ECB’s renewed support for increasing the stimulus program for EU countries, equities in the global markets rose sharply.
The focus next week in the U.S. (shortened by Thanksgiving) will be on housing (existing home sales, S&P Case-Shiller HPI, new home sales, FHFA house price index), manufacturing (PMI manufacturing index, durable goods orders), the consumer (consumer confidence), and GDP. Globally, in focus next week will flash PMIs. In addition, the focus will be on the following: UK (Gross Domestic Product); Eurozone (Manufacturing, Services & Composite PMI, M3 Money Supply, EC Business and Consumer Survey); Germany (Manufacturing, Services & Composite PMI, Gross Domestic Product, Retail Sales); China (nothing); and Japan (Manufacturing PMI, Consumer Price Index, Household Spending, Unemployment).
Year-to-date the markets are mixed: Dow 0.0%; S&P500 +1.5%; Nasdaq +7.8%.
The Markets for the past week were: DJIA up 3.4%; S&P500 up 3.3%; Nasdaq COMP up 3.6%.
Commodities (ETFs) for the past week were: Gold (GLD) down -0.45%; Silver (SLV) down -0.66%; Oil (OIH) up 0.54%; Dollar (UUP) up 0.70%; 30-year Bonds (TYX) dropped 4 basis points to 3.02%.
The VIX this past week (a measure of market sentiment and volatility) dropped to 15.47% reflecting the greater certainty of a December rate hike and renewed support by the ECB for additional stimulus in the EU.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is moderate:
o Monday – Existing Home Sales, PMI Manufacturing Index Flash
o Tuesday – GDP, International Trade in Goods, S&P Case-Shiller HPI, Consumer Confidence
o Wednesday – Durable Goods Orders, Weekly Jobless Claims, Personal Income and Outlays, New Home Sales, Consumer Sentiment, EIA Petroleum Status Report
o Thursday – markets closed (Thanksgiving)
o Friday – nothing
If you’re trading options, it is suggested trading Put Credit spreads for next week at 2.0 standard deviations or greater. Expect the price of the SPX to fall within 1995 and 2180 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.