These are challenging times we live in. We try to prepare for anything that comes our way. We knew this was going to be a big week. We entered Monday prepared for the major events we knew about on the calendar; namely the European Central Bank meeting, Fed Chair Janet Yellen’s Congressional testimony, OPEC’s semi-annual engagement and the November job report. These were all to be Market moving. The tragedy in San Bernardino was a surprise, but these days, nothing seems to be shocking in the world of Terrorism. Let’s hope they can be contained and minimized. We all need to remain vigilant in our daily endeavors. We certainly take that responsibility seriously with your life savings.
We’ve been focusing on the multiple crosscurrents at play for months and they converged in a big way this week. We are sailing on some unchartered waters, as our Federal Reserve is preparing for the first interest rate hike in a decade, and it should be coming in 2 weeks. This is the opposite of activity overseas, as Europe, China and Japan continue their aggressive economic stimulus packages, largely out of necessity. Things are not as stable overseas. The November job report came in better than expected, setting the table for the Fed rate hike. That is going to put pressure on the global system with our Fed tightening while the rest of the world stays very loose and supportive of their respective economies. But it needs to happen.
The big question is how the US Dollar responds. This would normally drive the Dollar higher, which has a negative impact on US exports as well as countries with Dollar-denominated debt. Knowing the rate hike is coming; the Dollar surprisingly had one of its weakest sessions in years. Conflicting monetary policy actions, mixed global economic data, narrow leadership of company earnings and revenue growth, political uncertainty, increased terror attacks and lack of clarity and continuity with the global production of oil have all contributed to a grinding US Stock Market which has the DOW and S&P flat on the year.
OPEC proved that the Oil cartel continues to be an unpredictable and untrustworthy group when it comes to policies. They’re not cutting production; in fact they have been increasing it, which took oil prices lower again. Saudi Arabia and its Gulf allies are sticking to their strategy of defending market share, hoping that lower prices would ultimately drive higher cost producers, primarily in the U.S., out of business. This isn’t a surprise at all. Many countries like Venezuela and Libya are suffering mightily, with operating budgets factoring in $100 oil. It’s been a disaster for them. The Saudi’s have massive reserves and are break-even around $10 oil, and are using that strength to regain influence and control. It is hurting OPEC as much as the rest of the oil producing world. Crude is flirting with the important $40 level, which is near the lows, and is actually holding in pretty well all things considered. The price of oil impacts all things economic.
On top of the economic and monetary issues around the globe, geopolitical issues are boiling over again. The spat between Russia and Turkey is getting more complicated, which is significantly influencing approaches with Syria and the war on ISIS. The tragic event in San Bernardino is another reminder that we are not immune to random violence and potential terror threats. The Market is getting skittish again. December is historically the strongest month for stocks, and the Friday rally has the DOW and S&P back near all-time highs. The Stock and Bond Market have been turbulent all year. We see it continuing. Buckle up, we’re in the final approach to 2016, and it’s going to be bumpy. We’re prepared and we’re all over it.
Have a nice weekend. We’ll be back, dark and early on Monday.
By: Mike Frazier