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Market Volatility Continued Over the First Full Week of 2015

Happy New Year everyone! Check out the return data for the equity and bond markets in 2014 at the end of this post. And look for our annual letter out next week.

Market volatility continued over the first full week of 2015. Stocks were up and down as investors tried to digest the latest gyrations in the oil markets. WTI oil lost another $5 this week (the seventh week of declines in a row) settling at $48 a barrel.

ISI notes: “The S&L Crisis in Texas was associated with the 1986 plunge in oil. The Russian Crisis and LTCM debacle were associated with the 1996-1998 plunge in oil. It seems reasonable to assume that the current plunge in oil will lead to crises somewhere.”

In the US, the S&P 500 lost -0.7% to close at 2044. Treasury bonds continued to rally on weak oil related inflation news and safe haven buying. The 10 year Treasury ended the week at 1.96%, down 15 basis points from last Friday.

Employment releases are the most influential macro indicators for capital markets. On Friday we learned that in December, monthly employment rose a better-than-expected +252,000 and the prior two months were revised up +50,000.  The unemployment rate fell to 5.6%. Interestingly, average hourly earnings fell in December and wages were only up 1.7% y/y. If that trend in sluggish wage growth continues the Fed may push back its timetable for raising rates.

ShopperTrak says holiday sales in November and December were up 4.6% vs a year ago, the best performance in 10 years.

Back to business as usual in Washington? Republicans say they will pass a bill approving the Keystone pipeline from Canada to Texas, disregarding President Barack Obama’s warning that he will veto the measure.

The average price for US gasoline fell to $2.30 a gallon at year end, according to the Energy Information Administration. It was $3.80 a gallon last May.

In Europe, stocks this week were down -3.1% (local currency) and -4.4% (US Dollar) owing to political turmoil in Greece and continued weakness in the euro – it’s at its lowest value against the dollar since 2006. Time to take that European vacation!

Consumer prices in the Eurozone fell in December and were down -0.2% y/y, for the first time since October 2009, increasing pressure on the ECB to step up its stimulus program.

Next week we get PPI and CPI inflation data in the US. It is sure to show significant declines in headline y/y inflation to 1% or less.

Falling oil prices and disinflationary trends are on everyone’s mind these days. Of note is a NY Times story reporting  that the contract rig company Helmerich & Payne has opted to stop using about 50 shale drilling rigs in the next month, which “sent shudders through the industry.” Falling oil prices will reduce supply and encourage demand. The 5 year forward price for oil is close to $70 and is probably representative of longer run equilibrium.

It’s good to be back in Alaska after a wet and cold Christmas in Texas!

Jeff Pantages, CFA®
Chief Investment Officer

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