Stocks Drop on Oil, FED Meeting Ahead

Highlights of this Week’s Update:

1. Now is a great time to start utilizing our new MyWealth system for your personal financial management/planning. Call us today to get started!
2. Stocks dropped last week on weaker oil, concerns with high yield bonds.
3. Interest rates moved lower, oil dropped to $35.35 per barrel.
4. Oil supply continues to outweigh demand.
5. FED meets this week-is expected to increase the FED funds rate by .25%.

READ ON FOR FURTHER DETAILS………………………………………………

2015 Coming to a Close:

As this year winds down, it is a great time for a personal and financial review in preparation for the New Year ahead.  We are here to help in any way we can with your long term planning, and also can provide you with the tools for both planning and tracking your personal finances and goals.  Call us today to schedule your personal planning session now as we get ready to complete another year and look forward to a new year ahead.  Our MyWealth system is available to all of you and if you have not been utilizing this valuable tool, let us assist you in getting started today!

The Markets:

U.S. stock prices dropped last week four out of five trading days, with the Dow Jones Industrial Average moving 3.26% lower, and is now down 3.13% year-to-date.  The broader based Standard & Poor’s 500 stock index fell 3.79%, making it 2.26% lower than the beginning of the year. (MarketWatch)

Interest rates moved lower as stock prices fell, with the yield for the 10 year U.S. Treasury falling to 2.13%.  This compares to 2.28% at the end of the previous week.  (U.S. Treasury)  Rates for a 30 year fixed mortgage ranged from 3.75-4.289% and 3.0-3.451% for a 15 year mortgage at the end of last week.  (Bankrate.com)

Oil dropped $4.78 per barrel, ending Friday at $35.36, the lowest level since early 2009. (Energy Information Administration) OPEC decided at its December 4^th meeting to leave oil production unchanged (Wall Street Journal). Although the outcome was widely anticipated, the oil market remains oversupplied with crude, and the news seemed to be the catalyst that sent oil sharply lower.

In some respects, OPEC, and in particular Saudi Arabia (OPEC’s largest producer), gambled and lost. Many suspect that OPEC decided last year to keep production high, drive prices down, and put the high-cost U.S. shale-oil producers out of business. Or at a minimum, drive oil prices below the cost of shale’s higher breakeven point. Recall last year that many analysts said the breakeven price for shale oil was around $70 per barrel (Bloomberg/Reuters). Shale production from the fracking revolution has proved to be far more resilient than many had anticipated, as hedging, continued innovation, new efficiencies, and falling costs supported output.

Here in the U.S., as Figure 1  illustrates, the oil rig count has dropped dramatically, but U.S. oil production has fallen modestly. It’s a classic case of too much supply and not enough demand to soak up that supply.

Economic and investment perspective

While there was plenty of talk last year that plunging gasoline prices would act like a big tax cut and boost consumer spending and the economy, the tax-cut comparison may have been somewhat flawed. A more accurate take: it was a transfer of wealth from oil producers to oil consumers.

Consumers have been big beneficiaries, and producers have been hit hard. While the U.S. Bureau of Labor Statistics says the U.S. economy has created 2.6 million jobs over the last year, mining, which includes oil and gas, has lost 122,000 jobs.  Moreover, both large and small energy companies slashed capital spending this year, and the Wall Street Journal reported last week another big round of cuts by some of the majors for 2016. From purely an economic perspective, it has drastically hurt energy stocks, hammered the energy industry, and pressured U.S. manufacturing.

Oil’s demise has also forced a big selloff in energy high yield “junk” bonds, which are the worst performing junk bond sector this year (Bloomberg).

Whether we analyze data from the Bureau of Economic Analysis or reference a recent Wall Street Journal story discussing the elusive economic boost from falling prices, it appears consumers are holding on to some of their savings and not recycling it into new spending. From purely an economic perspective, the expected economic windfall from falling energy prices has yet to materialize.

Upcoming Week-All Eyes on the FED:

Despite market volatility last week tied to falling oil prices and problems in the high-yield debt market, the Fed is expected to increase rates for the first time in almost 10 years. While there is chatter in some corners the Fed could blink again, as it did in September, it would create serious credibility issues. If not now, then when?  Most analysts do expect a .25% rate hike at this week’s meeting.  We will keep you posted.

We appreciate the privilege to be of service, and wish you all a safe week ahead.  As always, please don’t hesitate to call if we can be of further service in any way, or if you have any questions or concerns.

God Bless,

Your TEAM at F.I.G. Financial Advisory Services, Inc.

 

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