Week of December 14, 2015
The Federal Reserve and commodities conspired last week to make it one to forget. Equity markets collapsed, the U.S. dollar dropped, oil continued its slide and the junk bond market was thrown into turmoil.
The S&P 500 dropped 3.8%, its steepest weekly decline since the late August rout. This pushed the index into negative territory for the year. The Dow Jones Industrial Average fell 3.3%. And, the Nasdaq Composite collapsed 4.1%.
Oil Prices Collapse While OPEC Continues Pumping
Last week oil prices closed at seven year lows when they dipped below $40 a barrel. This has capped off a 30% slide since the beginning of the year and the current quote is nearing the lows reached shortly after the housing crisis. The recent drop has prompted the U.S. Energy Information Administration to cut its 2016 forecast to just under $51 a barrel. The price decline is coming largely from increased supply. The Organization of Petroleum Exporting Countries (OPEC) has raised crude oil output to its highest rate in more than three years as it continues with its strategy of protecting market share. For the month of November, OPEC pumped more than 31.6 million barrels a day, the highest level since April 2012.
“Hey Look Kids There’s Big Ben, Parliament”
All eyes this week will be on the Federal Reserve’s Open Market Committee meeting where it is expected they will raise rates. This move has been widely anticipated following the last few releases of economic data that continue pointing to an improving domestic economy. However, investors are preparing for the move by packing up and heading to Europe. According to Bank of America, U.S. equities have suffered $124 billion of outflows the year while European equities have experienced an almost equal amount of inflows ($115 billion). This rotation can be seen in the performance of each geographic region’s major indexes. The S&P 500 is down more than 1.5% year-to-date while its European equivalent, the Euro Stoxx 600 is up more than 5%.
Household Net Worth Declines
Last week, the Federal Reserve released its Flow of Funds report that showed U.S. households lost $1.2 trillion of wealth in the third quarter. This is the first decline in four years. The primary culprit of the decline was the pullback in stocks, which destroyed $2.3 trillion of wealth over the quarter, largely due to the sharp pullback in late August. This was partially offset by the rise of other assets during the period. Real estate values rose more than $480 billion while checking and savings deposits increased by $132 billion. This data has historically been a good indicator of future household consumption, and thus economic growth. When wealth increases so does consumer spending, usually at the expense of savings. The opposite is true when wealth declines. This may foretell a slowing of the domestic economy, but perhaps not. Despite the decline, aggregate household wealth remains near record levels at more than $85 trillion. This compares to just $55 trillion in the middle of the housing crisis. Additionally, equity markets have rebounded more than 5% since the September, so aggregate household wealth should post some growth when the fourth quarter figures are reported early next year.
Fun Story of the Week
We have all at one point walked out into a large parking lot and wondered, sometimes aloud, “Where’s my car?” Apparently remembering where you parked doesn’t just happen with drivers. It happens to jet pilots too. Early last week, the Kuala Lumpur International Airport attempted to locate the owners of three 747s that have been left on its tarmac. Airport officials even placed ads in The Star, Malaysia’s largest English-speaking newspaper asking the owners to come retrieve the jets. If the 747s are not claimed within two weeks, the airport plans to sell them and use the proceeds to pay off debt. The planes have been abandoned for nearly a year and it has been impossible to track down the owners, implying they were left there on purpose. Or, perhaps there is someone wandering around the world wondering, “Dude, where’s my plane?”
Please feel free to forward this commentary to family, friends or colleagues. If you would like us to add them to the list, please reply to this email with their email address and we will ask for their permission to be added.
Securities offered through Jacques Financial, LLC (JFLLC) a Broker-Dealer, Member FINRA and SIPC.Certain associates of Joseph W. Jacques, CPA, CFPTM are registered representatives of JFLLC. Joseph W. Jacques, CPA, CFPTM and JFLLC are affiliated. Investment advisory services are offered through Jacques Advisors, LLC an affiliate of JFLLC. Tax services are offered through Jacques & Associates Certified Public Accountants, LLC an affiliate of JFLLC.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance. The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. To determine which investments may be appropriate for you, consult with your financial advisor. * The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The Nasdaq Composite Index is a market-capitalization weighted index of the more than 3,000 common equities listed on the Nasdaq stock exchange. The types of securities in the index include American depositary receipts, common stocks, real estate investment trusts (REITs) and tracking stocks. * The Dow Jones Industrial Average is an unmanaged group of securities demonstrating how 30 large publicly owned companies have traded and cannot be invested into directly. * STOXX Europe 600 Index represents large, mid and small capitalization companies across 18 countries of the European region: Austria, Belgium, Czech Republic, Denmark, Finland, France, Germany, Greece, Ireland, Italy, Luxembourg, the Netherlands, Norway, Portugal, Spain, Sweden, Switzerland and the United Kingdom. * Indexes are unmanaged, statistical composites and their returns do not include payment of any sales charges or fees an investor would pay to purchase the securities they represent. Such costs would lower performance. It is not possible to invest directly in an index. * Past performance does not guarantee future results. * Charts and graphs should not be relied upon as the sole basis for any investment decision and are for general informational purposes only. * Consult your financial professional before making any investment decision. * This newsletter was prepared by CWM, LLC. * Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
The Guardian, December 2015, http://www.theguardian.com/world/2015/dec/09/malaysia-seeks-owners-three-boeing-747s-abandoned-airport-kuala-lumpur
Bloomberg, December 2015, https://www.bloomberg.com/news/articles/2015-12-10/opec-says-crude-production-rose-to-three-year-high-in-november
Wall Street Journal, December 2015, http://www.wsj.com/articles/oil-prices-rise-but-more-pain-is-expected-1449577680
Bloomberg, December 2015, https://www.bloomberg.com/news/articles/2015-12-10/investors-switch-out-of-u-s-stocks-and-into-european-equities
Wall Street Journal, December 2015, http://www.wsj.com/articles/fed-report-says-u-s-household-net-worth-declined-by-1-2-trillion-1449767142
Wall Street Journal, December 2015, http://www.wsj.com/articles/junk-bond-selloff-intensifies-after-funds-demise-1449857705
Bloomberg, December 2015, http://www.bloomberg.com/news/articles/2015-12-11/charting-the-markets-the-week-to-forget-for-global-stock-investors