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Week of December 21, 2015

Last week was a tale of two markets. Strong gains ahead of the Federal Reserve’s announcement to raise rates on Wednesday were more than erased by steep declines in the last two days of trading. When the dust settled, the S&P 500 fell 0.3%. The Dow Jones Industrial Average slipped 0.8%. And, the Nasdaq Composite retreated 0.2%.

Part of the weakness in the back half of the week was associated with continued deterioration of commodity prices, particularly oil. West Texas Intermediate crude oil prices fell below $35 a barrel. This was the third consecutive weekly decline as the per barrel price fell to lows not witnessed since the housing crisis.


Last Wednesday, the Federal Reserve enacted the most anticipated move in the history of monetary policy by passing a 25 basis point rate hike, its first in nearly a decade. In her post meeting press conference, Fed Chair, Janet Yellen, emphasized that the path of rate hikes would be gradual over the next three years. According to the “dot plot,” the estimated Fed Funds rate is less than 1.5% for 2016. This represents four rate hikes in the coming twelve months, which is double the amount the market appears to be expecting. Market participants question whether the domestic economy is strong enough to withstand multiple rate hikes. While the employment picture brightens, manufacturing continues to be weak and rate hikes could push the U.S dollar higher, which would continue hindering the earnings of multi-national corporations with significant international exposure. We note that history has shown that rate hikes do typically occur faster than most expect once liftoff is achieved. 122115 Chart 1

Housing Starts Show Strength

While the equity markets move lower, the housing market continues to show strength. Homebuilders broke ground on nearly 1.2 million units, up 10.5% month-over-month, according to the recent Commerce Department report. Year-to-date, construction has risen at roughly the same rate over the same period for 2014. Despite the momentum this year, new home construction still remains about half of its 2006 peak. On top of this, the mix of construction is still more skewed toward condominiums and multi-family units, or apartment buildings, than it was back then. However, this appears to be changing. Starts for single-family units reached an eight-year high in November. Looking forward, housing analysts look for the market to moderate in 2016. A survey of 200 home builders implies growth may start slowing to 6% for 2016.

Santa Brings Sub-$2 Gas

According to GasBuddy, the average price of a gallon of gasoline fell to $1.999 last week. This compares to more than $2.10 thirty days ago and nearly $2.45 at the same time last year. It is also the first time in the last six years that the average price has dipped below $2. American motorists continue to benefit from the 68% collapse in oil prices over the past year and a half. A barrel of West Texas Intermediate crude oil fell to below $35 last week. This is also in the lowest level for this commodity since February 2009. Experts expect gas prices to remain depressed for the new future. U.S. refineries are producing almost ten million barrels of gasoline per day, and OPEC shows no signs of pumping less oil out of the ground. 122115 Chart 2

Fun Story of the Week

Sunday, December 20 marked the annual Miss Universe pageant and for the first time in history, viewers may better remember the first runner-up over the actual winner. If you changed the channel after Miss Colombia was named Miss Universe 2015, you may have missed the most memorable part of the broadcast – when host Steve Harvey came back on stage to admit he had made a mistake and the actual winner of the crown was Miss Philippines. In an awkward turn of events, the reigning Miss Universe (also hailing from Colombia) had to remove the crown and sash from Miss Colombia after she had already celebrated her win with the infamous pageant wave, blowing kisses and proudly waving her nation’s flag. While the broadcast was cut-off before Miss Philippines was able to have her crowning moment on stage, she called the snafu “non-traditional”and “very 2015.” And though Miss Colombia may have missed out on the chance to reign over the universe, the world will not soon forget the name Ariadna Gutierrez – nor the night that made her famous.

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