Market Insights: December 16, 2014
Economic Outlook: So is it all about oil prices?
- It seems like it is all about oil prices. The “Alarm” argument is simple: lower oil prices mean things must be weak globally. Further, these lower oil prices might trigger some new financial crisis with the banks or the junk bond market?
- While oil prices are obviously down, overall commodity prices are not in any significant decline. And though oil prices are down, the more important question is how long they will stay at these levels?
- A review of the CRB data indicates the broad index of commodity prices has been trading in a range for about 3 years. This index is presently near the low end of its range, but is definitely not breaking to new lows.
- This CRB index has actually been a pretty reliable indicator of global economic activity, so the fact that it is not breaking down suggests there is not yet cause for panic. This may have more to do about supply of oil than the global economy. And remember the old maxim: the cure for lower commodity prices is lower commodity prices.
- Let’s review the data. The U.S. is the leader for global developed economies. U.S. industrial production has advanced significantly since the 2009 lows. We had an increase of 1.3% in November and the contributions are widespread in terms of sectors.
- Despite the gloomy talk, this November post for industrial production is the strongest monthly performance since the first half of 2010.
- The Euro-zone is clearly not in the same place. It has more or less stalled since 2011. Italy and France are notably dragging down the Euro-zone results.
- By contrast, production is holding firm in emerging economies. UK output is also strong.
Equities Outlook: Half full or Half Empty?
- The S&P 500 suffered a 3.5% decline last week, which is the largest weekly decline in several years. To maintain perspective, however, let’s not forget we are still up with a double-digit year-to-date gain as of last Friday.
- Part of the equity market uncertainty is the fear that the Fed may drop from their statements the assurance that they intend to keep rates low for a “considerable time”. Equity markets like the accommodative Fed policy and are sensitive to any inflection points in the direction of that policy. Statement or not, there are factors at work that might suggest the Fed will go slow in withdrawing their accommodation.
- S&P forward earnings estimates for 2015 are coming down, due to reduced estimates for energy companies. However, we are still talking solid single-digit numbers for earnings growth. Lower oil prices benefit consumers and this affects all of the non-energy sectors of the market in a positive way (Airlines are an easy-to-understand example).
- In the environment closing out 2014 and heading into next year, non-resource sensitive sectors are likely to show the stronger performance.
- The L&W Investment Committee is reviewing our relative weightings in the various economic sectors. While the divergent performances in 2014 may create some opportunistic possibilities, our judgment is that maintaining a broadly diversified equity approach wins the risk-reward balancing act at this juncture.
Fixed Income Markets: How low can it go?
- Lower oil prices and a strong dollar tend to keep U.S. inflation low. This removes pressure on the Fed to begin the long-expected rate tightening cycle.
- The interest rate on the ten-year U.S. Treasury Note ended last week at 2.10% on Friday. This is down hard from where it closed the Friday before (2.31%). Fears about global slowdown and lower oil prices are the blame.
The Week Ahead
A slow news week ahead – just a few significant data releases
- Housing Starts
- PMI Estimate for China
- Euro-zone CPI