week in brief: December 18

December 21, 2015

Last week saw markets open with a dash of holiday cheer. Only to be grabbed by the Grinch and dragged up to his mountain hermitage. And while we can think of many reasons the Grinch stole last week's bull market, we believe the best reason of all may have been that his heart was two sizes too small.
After peaking on Wednesday at three percent, the S&P 500 was stymied. And ended the week with a 0.3 percent loss. Investors responded fearfully to the Fed's first interest rate hike since 2006. Other factors included plunging oil prices, the annual rebalance of the S&P 500, options and futures expiration, year-end tax selling, and the liquidation of a few failing hedge funds. A real holiday fruit cake of fear and loathing.
Stocks joined energy and commodities as nearly all asset classes headed lower. In fact, the Bloomberg Commodity Index hit its lowest level in 16 years. And is close to setting an all-time low since the index's launch in 1991. Very worrisome.

Remember, during the tech collapse, the tech index dropped 83 percent before the smoke cleared. During the financial collapse, the financial index dropped 83 percent before the smoke cleared. The energy index has thus far dropped 38 percent. Which feels terrible. But if the Saudis deliver on their promise to maintain sub-$40 oil for the next six months? It will plumb new depths.
So, the Fed finally lifted rates. Whooptey-fricking-do. Most respected Fed watchers predict four quarter-point hikes throughout 2016. Don't forget, however, that the global financial system has been addicted to easy money methadone for six years. Now, higher rates catalyze a chain reaction. Attracting more money to U.S. credit. Which drives up the dollar. Which depresses commodities. So undermining emerging markets. And cutting the legs out from under the multinational companies that rely upon emerging market sales.
Fed officials knew this. And, citing strong economic data, were willing to risk it.
But, the Philly Fed manufacturing index came out immediately thereafter. Posting a negative 5.9 in December. Down from +1.9 in November. The reading was well below the +2.0 consensus, marking the third negative reading in four months. And the lowest level this years. New orders and activity have moved further into contraction. The future activity index hit its weakest level in over three years. All of which provides a buffet of negative economic data. And bringing some to wonder what strength Yellen and Co. were eyeing recently.
Bottom line? Stocks rebounded off the August/September lows. Stemming the market's decline to a garden-variety 12.5 percent pullback. Since then, bulls have gotten nowhere. Viciously attacked by bears every time they approached the July highs.
While we'd hoped for an end-of-year rally (common, Santa!?), we're no longer expecting the open-field running to close the year that we've experienced each December since the bull began. Typically, end-of-year optimism begins to take hold and prices follow its gravitational pull higher. So, we continue to await that trend. Or wonder if it will be in absentia this year.
Adding insult to injury, the third year of presidential cycles tend to be very good for markets historically. Moreover, years ending in five have traditionally been among the strongest. Put the two together? Game on! But, not this year. Not yet. And markets will be challenged to simply get back to an absolute positive return by year end. No reason to panic. But the best long-term asset at our disposal is a sense of rational realism, peppered with a dash of optimism. And so we'll play the cards this market deals.
We wish you the Merriest of Christmas seasons and a Happy New Year. We'll likely allocate our writing time next week to friends and family. Celebrating the holidays with those we love. So let's plan to reconvene after the New Year. At which point we'll continue to chart a course towards financial success.
The Good
Omnibus spending bill easily passed through the legislature last week, ruling out government shutdown fears till September... L.A. port traffic was strong with a November gain of 6.6% YOY... Leading economic indicators beat expectations, 0.4% v. 0.1%... Bullish sits at a three-year low (a contrarian bullish indicator)... Building permits and housing starts both beat expectations... Initial jobless claims edged lower... Mortgage equity withdrawal was the best since 2008...
The Bad
Fed press conference conveyed that Fed rate hike expectations remain disconnected from market expectations, signifying a disparity in economic perceptions... Industrial production was weak, declining by 0.6%... Rail data continues to weaken...
The Ugly
Martin Shkreli, drug company CEO who jacked up costs of a life-saving treatment, was arrested for securities fraud. Sometimes the guy who appears to be a complete ass is, in fact, a complete ass. Surprise!
Weekly Results
Major markets finished lower last week. The DJIA fell 0.79%, the S&P 500 lost 0.34%, and the Nasdaq declined 0.21%. Small cap stocks dropped 0.23%. And the 10-year Treasury bond yield rose 7 basis points to 2.20%. Gold lost $8.59 per ounce, or -0.80%.

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