For the week ending February 12, 2016, the stock market finished another volatile period due to declining oil prices, weakening global markets, and comments by the Fed. On Friday, both the Dow and the S&P 500 broke a four-day losing streak by rallying around 2 percent, but still ending the week down. In other news: there’s a 50 percent chance of a recession this year; consumer sentiment continues to fall; and, oil has its best day in nearly 7 years. Below is a recap of the markets for each day of the week.
The markets dropped on Monday as crude oil prices dropped sharply. Oil dropped $1 to $30. The Dow dropped -1.1 percent to 16,027; the S&P 500 dropped -1.42 percent to 1,853.
On Tuesday, the markets dropped slightly as crude oil prices continue to tumble, offset by an excellent JOLTS report. Oil dropped nearly $1.75 to $28.25. The Dow dropped fractionally to 16,014; the S&P 500 dropped fractionally to 1,852.
The markets dropped on Wednesday after Fed Chair Janet Yellen, testifying before Congress, said stress in global markets is a risk to the U.S. economy. Oil dropped $0.75 to $27.50. The Dow dropped -0.6 percent to 15,914; the S&P 500 dropped fractionally to 1,852.
The markets on Thursday dropped dramatically as Sweden’s central bank cut its rate to -0.5 percent (a negative rate). Oil dropped $0.50 to $27. The Dow dropped -1.6 percent to 15,660; the S&P 500 dropped -1.23 percent to 1,829.
The markets Friday rose sharply on a very strong retail sales report which raised first-quarter GDP estimates, and a rally in crude oil prices. Oil rose $2 to $29. The Dow rose 2.0 percent to 15,973; the S&P 500 rose 1.95 percent to 1,865.
Despite the rally on Friday, the markets ended in the red. This is the second week the markets have been down, with the Dow losing -8.3 percent (-1,451 points) for the year and the S&P 500 losing -8.8 percent (-179 points). Investor sentiment is largely negative and investors are losing confidence in their central bank’s ability to manage their economies. The growing concern is that a weakening global economy will bring down the U.S. economy. However, while U.S. stocks are tanking, the U.S. economy is not (at least, not yet). Retail sales on Friday rose 0.2 percent, exceeding expectations.
Odds of a recession in 2016 is now at 50 percent. The S&P 500 has tested the 1,800 level which is -14 percent from its recent peak. Any break below that level, says market watcher Bob Doll, will indicate a 50 percent probability of a recession. If a recession occurs, the S&P 500 could fall to 1,600; else, we should see the index claw its way back to 2,000. The big driver for falling stock prices, says Doll, is the decline in crude oil prices (currently below $30 per barrel for WTI). Another cause for the decline in stocks is the strength in the dollar. If the dollar starts to weaken as oil rises, then the economy should continue to grow. With all the growing talk of a recession, any drop in stocks generates greater fear of a crash.
Consumer sentiment continues to wane as the index drops further than expected. The Index of Consumer sentiment dropped to 90.7 in February’s preliminary reading (92 expected), down from a preliminary reading in January of 93.3 (and a final reading of 92). This index is a barometer of economic health and is closely watched. Falling consumer sentiment occurred despite growing retail sales (which reflects a stronger labor market). What’s keeping consumer sentiment afloat? Consumers base their optimism on extremely low inflation transforming low wages into real income gains.
The rally in crude oil prices on Friday was the best one-day gain nearly 7 years. The huge rally came after the United Arab Emirates’ (UAE) energy minister said OPEC is willing to cooperate in reducing oil production. The comment came after earlier attempts during the week by Venezuela and Russia to encourage major oil producers to cut production failed to raise investor interest. With the latest slump in oil prices, many investors are now expecting a rebound and the remarks made by the UAE minister sparked the rally. It is likely that we will see wider swings in crude oil prices in the near future.
The bottom line: Fed Chair Janet Yellen has stated that the schedule for rate hikes this year is still on the table. This conflicts with negative policy rates in Asia and Europe raising concerns of a recession. Yellen recognizes that global events are raising the risk level, and the next rate hike in March could be delayed (and will not be a rate cut).
The focus next week in the U.S. (a shortened holiday week) will be the Empire State report, the housing market index, housing starts and permits, FOMC minutes, initial jobless claims, and consumer prices. Globally, global growth, oil prices, and central bank policies will be the key attractions. In addition, the focus will be on the following: UK (CPI, PPI, Labor Market Report, Retail Sales); Eurozone (ECB Account Monetary Policy Meeting, Merchandise Trade Balance); Germany (ZEW Business Survey); China (Merchandise Trade Balance, CPI, PPI); and Japan (GDP, Machine Orders, Merchandise Trade Balance).
Year-to-date the markets are down: Dow -8.3%; S&P500 -8.8%; Nasdaq -13.4%.
The Markets for the past week were: DJIA down -1.4%; S&P500 down -0.8%; Nasdaq COMP down -0.6%.
Commodities (ETFs) for the past week were: Gold (GLD) up 5.38%; Silver (SLV) up 4.53%; Oil (OIH) down -4.98%; Dollar (UUP) down -0.99%; 30-year Bonds (TYX) dropped 7 basis points to 2.61%.
The VIX this past week (a measure of market sentiment and volatility) rose to 25.4%. This reflects the drop in oil prices, poor corporate earnings, declining global economic growth.
To see what’s on the calendar for next week, go to the Econoday calendar.
The economic calendar for next week is full:
o Monday – markets closed for Presidents Day
o Tuesday – Empire State Mfg Survey, Housing Market Index, Treasury International Capital
o Wednesday – Housing Starts, PPI-FD, Industrial Production, FOMC Minutes
o Thursday – EIA Petroleum Status Report, Jobless Claims, Philadelphia fed Business Outlook
o Friday – Consumer Price Index
If you’re trading options, it is suggested trading Put or Call Credit spreads for next week at 3.0 standard deviations or greater (or simply stand aside). Expect the price of the SPX to fall within 1739 and 1998 (2 standard deviations).
For more information about options, see the ‘Suggested Links’ below.