Investors are seeking to overlook some of the disappointing returns across U.S. equities in 2015 and decide where to put their money to work in 2016 for better results despite some challenging economic fundamentals that could still challenge the market in the months ahead.
In 2015 the Dow lost 2.2 percent and the S&P 500 dropped 0.7 percent.
The Nasdaq was positive in 2015 with gains of 5.7 percent.
Three dominant narratives for the economy in 2015 that led to more headwinds was the major decline in crude oil prices, slowing Chinese growth, and monetary policy tightening in the U.S. after Federal Reserve increased interest rates in December for the first time since mid-2006.
Those three dominant themes alongside a strengthening U.S. dollar and drop in global commodities held back economic growth in 2015, resulting in lackluster U.S. stock market returns.
In 2015 Brent Crude fell 35 percent to close at $ 37. 28 a barrel on 12/31/15.
U.S. (WTI) Crude didn’t fare much better and slid 30 percent in 2015 to close at $37.07 a barrel on 12/31/15.
In 2014 U.S. crude declined 45 percent.
Global Oil Glut
There is a glut in global oil that some oil analysts believe could linger until the 3rd quarter of 2016 due to a variety of factors including weaker global demand coupled with large quantities of crude oil available due to the reality of U.S. shale oil production keeping U.S. oil exports down, and strong oil production continuing from countries such as Iran, Iraq, Libya, and Saudi Arabia.
Oil export giant Saudi Arabia doesn’t want to lose market share by advocating for OPEC production cuts which would raise the price of crude oil and lead to more U.S. shale and Canadian oil production returning to the market, fighting for market share, especially now that the 40 year export ban was recently overturned by the U.S. government in December.
The dramatic drop in crude oil prices over the past 2 years back to recession levels in 2008-2009 has hurt oil export nations that depend on high crude oil prices to help balance their national budgets and keep their economies strong.
Countries such as Canada, Russia, Venezuela, and Saudi Arabia are all faced with declining oil revenues and economic challenges in this new era of low crude oil prices.
The Week Ahead
Although the first rate hike since 2006 is now officially underway, investors will still be watching U.S. jobs reports closely because future rate hikes are tied to their performance along with inflation that has increasingly been under pressure due to the tumble in crude oil prices.
On Friday the Bureau of Labor Statistics releases the non-farm labor report for December. Economists from briefing.com forecast 200,000 non-farm payroll jobs to be added to the U.S. economy in December while the unemployment rate is expected to move slightly higher to 5.1 percent from 5.0 percent.
Next week will be a busier week for economic reports compared to the last 2 weeks that saw shortened trading weeks.
On Monday construction spending (November) and the ISM Index (December) will be reported.
On Tuesday auto and truck sales (December) will be reported.
On Wednesday private payroll processor ADP will release December’s private sector payroll growth. The MBA Mortgage Index and MBA Mortgage Purchase Index (1/2) will be announced. Factory Orders and Trade Balance (November) will be reported in addition to ISM Services for December. Briefing.com estimates an increase to 56.0 with the December reading. Crude Inventories (1/2) will also be reported on Wednesday.
On Thursday the weekly jobless and initial claims will be reported along with Challenger Job Cuts (December) and Natural Gas Inventories (1/2).
On Friday the non-farm payroll report is released along with consumer credit (November) and Wholesale Inventories (November).
- written and edited by Johnathan Schweitzer