Markets Plunge As Oil Panic Spreads: Oil Has World Markets Over A Barrel As Fed Mtg. Looms; Oil Plunge The Grinch Who Stole The Traditional Santa Claus Rally In Stocks – Looking Into 2015
If you go back to this time last year and read the stock market outlook and predictions for 2014 — I doubt if there are any that forecast oil selling at $58 per barrel; and, threatening to go lower. And, the selloff, while good for U.S. consumers, is wreaking havoc on their 401K plans and stocks worldwide. Last week, U.S. stocks suffered their largest weekly point decline in more than three years — with the DOW losing 678pts., or 3.88 percent in just five trading days. “These kinds of markets test the mettle of investors, said Tom Stringfellow, President of First Investment Advisors. “You have to step away from the monitor so you don’t do anything stupid, like hit a sell button.” But, as Avi Salzman noted in this weekend’s Barron’s, “traders ditched that advice, pounding sell buttons with hands as the selloff spread.
And, oil’s retreat may not be over yet. Several big-time Wall Street firms have forecasts that go down as far as the low $40s by early next year. Crude futures last week dropped $8 per barrel, or 12.2 percent to $57.81, the lowest price it has settled at since May 2009. Mr. Salzman wrote oil hit its 52-week high of $107.26 in June; and, has since fallen 46 percent — and, down 24 percent in just the past three weeks.”
And, there was more bearish news on Friday. The International Energy Agency cut its estimate for oil demand growth in 2015; and, Saudi Arabia’s Oil Minister said Thursday that the country had no intention of cutting production. “The story for crude remains the same — slower global growth, excess supply, and an unwillingness of OPEC and others to cut production, as they continue to vie for their market share,” wrote Yousef Abhasi, Global Market Strategist at James Trading.
“I think the stock market is looking at what the bond market is looking at, This energy theme is a problem, not just a problem to inflation; but, it’s reflecting something else. It’s reflecting slower [global] growth. It’s reflecting risk assessments from junk bonds, to high-quality energy stocks,” said CRT Capital’s Chief Treasury Strategist, David Ader.
David Bianco, Deutsche Bank’s Chief U.S. Equity Strategist, said “the rapid wipe-out in oil prices has quickly changed the dynamic for the stock market. Obviously, the consensus thinking was Santa Claus rally into year-end; and, then deal with these challenges from oil and outlook for CAPEX (capital expenditures) — which is an issue for industrials and some materials companies,” said Bianco. “Surely, it’s totally unexpected. We are aware for the potential for market softness, but it’s surprising it’s December.” Bianco added “the combination of a strong dollar and a plunge in oil prices these are the hallmarks of a profit recession — even if the economy is doing fine. You can argue the pain is isolated to multinationals and producers exposed to the industry….It’s a big problem for them; but, it’s hard for other sectors to offset it. If there is another strong leg up in the dollar, then there’s another headwind on earnings growth.” Mr. Bianco is expecting “massive profit decline in the energy sector; but, also a very low 2, or 3 percent growth in industrial materials sector earnings. Industrial earnings are estimated to be 9.7 percent higher this year,” Bianco added.
Looking Into 2015
“My hunch is when we bottom, there will be a ricochet; and, in 2015, and we’ll see a broad span of prices. I think the futures could go to $35 to $45. It’s not a sustainable price. We’re seeing physical prices for crude that are already there,” said Tom Kloza, analyst and founder of Oil Price Information Service. “Don’t underestimate the ability of panic to drive prices lower than where they should be. It’s going to be a wild 2015; and, a wild rest of 2014.”
“I think over the course of 2015, the [stock] market gains, but it’d going to be a tough start,” Mr. Bianco contends. He sees the S and P 500 reaching 2,150 by the end of 2015; and his year-end 2014 target is 2050. He believes health care and consumer discretionary should see the best profit growth in 2015; and, domestic financials becoming more attractive — particularly with the Fed poised to raise rates by the middle of next year.
I will do a year-end market note; and, what the investment pros see ahead in 2015, in an update later this week, or next. For now, it would seem more selling in oil is likely; and, I would not be shocked to see gold have some volatility here as Russia and others sell the yellow metal to offset some of their losses in oil revenues; and, hopefully allow them to buy time to weather the storm in oil’s plunge. V/R, RCP