Weakening commodity prices took their toll on the financial markets this week. The S&P 500 lost 3.7% closing at 2,012. Most of the foreign equity markets slid over 3% while natural resource countries like Canada and Mexico saw their stock markets down closer to 6% (in dollars). Ten year Treasury prices rallied as yields fell 14 basis points to 2.13%.
WTI oil traded below $36, a seven year low, on OPEC disarray and warm weather. The good news? Gas prices in the lower 48 are below $2 a gallon, in fact $1.70 in Texas. Best I can do in Anchorage is $2.15 at Costco!
OPEC R.I.P. Bloomberg notes that OPEC has “abandoned all pretense of acting as a cartel.” It’s now every member for itself. OPEC pumped more oil in November than any month in three years. Saudi Arabia is pumping, pumping, pumping, to put US frackers out of business and to weaken arch rival Iran.
In Alaska, Governor Walker announced his solution for the $3.5 billion budget gap – an income tax and lower individual Permanent Fund Dividends, among other proposals. While the plan has been criticized from both sides, it seems to be a reasonable starting point for negotiations as you really can’t “cut your way out” of a deficit this big. The state has a GDP of $50 billion so cutting $3.5 billion of state spending would be devastating and likely cause a recession. UAA Professor Scott Goldsmith shares his views on the Alaska economy and the Governor’s proposed plan, Alaska’s Economy.
Contrarians take note: ISI reports that equity mutual funds and ETF outflows this past week were $30 billion, bringing YTD withdrawals to $123 billion (and much greater than in 2008). These investors have moved $51 billion into bond mutual funds and ETFs. In other words sell bonds, buy stocks if you are a contrarian.
Dow Chemical and DuPont said Friday that they have agreed to merge, melding two of the US’s oldest companies into a chemical giant worth about $130 billion. So far in 2015 M&A activity in the US is at record levels.
Japan averted a recession in the third quarter as the economy grew at an annual rate of 1.0%, after a 0.8% contraction in Q2.
US retail sales were slightly weaker than expected (+0.2%) in November, but the ex-auto components of retail sales were better than expected at +0.4%. The US economy is fine.
Will next Wednesday be lift–off? The Fed has kept rates close to zero for seven years. It looks all but certain that they will hike rates 25 basis points at the next FOMC meeting. Chair Yellen will no doubt offer that future increases will be gradual and data dependent at her 10 AM press conference. All eyes will be on the Fairy Godmother of the bull market.
If you haven’t noticed we have seen a big jump in short term rates of late. Three month T-bills had traded close to zero for much of the year but from about late October we have seen yields pop to 0.25%. It’s the market anticipating a Fed rate hike.
Have a great weekend everyone.
Jeff Pantages, CFA®
Chief Investment Officer