After weeks of anticipation, the Fed made its move and raised rates by the expected quarter point. But the announcement gave no clear signal when the next hike will come. This brought uncertainty into the minds of investors and volatility to the markets. We all know that the market hates uncertainty. What to look for? Watch 2,100 on the S&P 500.
If the level is above 2,100, that’s probably good news. If rallies fizzle below 2,100, that may be a sign to look out below.
In the meantime, thanks to Dent Research, here is our information roundup ending the week on December 18, 2015. We hope this information will help you separate the noise from the news. We start each subject with what you hear in the news and finish with what that information means to you.
The Federal Reserve Raised Overnight Interest Rates by 0.25%... For the first time in nine years, the Fed raised interest rates.
What it means – We wish this move meant that we could stop talking about the Fed, but it doesn’t. Chair Yellen said the central bank will base future rate decisions on data as it comes out, and added that the rate of increase would be gradual.
You don’t have to read between the lines to figure out that we don’t have a set schedule for raising rates at future meetings, so every time we get to another Fed gathering there will be much debate and controversy of what will happen. It’s hard to see how the Fed will telegraph subsequent moves as much as they did this one, which means more uncertainty and volatility for the markets.
Junk Bond Prices Plummet as Funds Closed Their Doors… Several large junk bond mutual funds shut down over the past week, sending shockwaves through the market.
What it means – Third Avenue Fund experienced heavy redemption requests but was unable to sell enough bonds to meet the cash calls. In response, the fund threw up a “gate,” meaning that investors will have to wait until the bonds can be sold in an orderly fashion to get their cash. That could be a while. The news of Third Avenue’s problems sent investors scrambling to get out of other junk bond funds, so now many fund managers are trying to sell their bonds at the same time, driving down prices.
The catalyst for all of this is cheap oil; a situation Harry Dent described in the September Boom & Bust. Energy companies issued loads of bonds over the past five years, and now can’t make good on the interest and principal. Given the current state of the energy market – abundant supply and lackluster demand – this won’t clean up anytime soon.
Look for more bankruptcies in the energy sector and more pain in junk bonds in the months ahead.
Oil Drops below $35 per Barrel… Reacting to the largest inventory build in December in over two decades, the price of oil dropped more than 4%, dipping below $35.
What it means – This is definitely a December to remember for the energy sector, but not in a good way. While oil was dropping through the lows of the financial crisis, natural gas was falling to levels last seen in 1999. The warm December temperatures, brought on by the El Nino weather pattern as expected, are saving Americans a bunch of cash they would have spent on heating oil, electricity, and natural gas. The oil patch is feeling the pain. We expect the weather to turn colder as we roll into 2016, which should put a floor under the price of oil and natural gas, at least temporarily.
Housing Starts Jumped, Up 10.5% to 1.173 million Units… Multifamily housing starts increased 16.4%, while single-family starts rose 7.6%.
What it means – These are good reports. Year-to-date single-family housing starts are up 14.6%, another good note for the economy. We’re skeptical of the pace of building, since this fall the industry has been helped by exceptionally warm weather along the East Coast and in the Southeast.
When the cold weather returns, as it always does in winter, the numbers will most likely drop back a bit.
Industrial Production Down 0.6% in November, Capacity Utilization Dropped from 77.5% to 77.0%... The warm weather weighed on utilities, while the energy sector pulled down mining. Manufacturing was flat.
What it means – Because of weather, this report is a bit backward. Utilities look horrible, but when the weather turns cold, they should bounce back. Mining, which includes oil and gas drilling, won’t jump when the temperature falls, but there should be a bit of a rebound when we start drawing down inventories from record levels. Manufacturing, which is the bright spot of this report, is the most negative area. The flat reading last month reflected weakness in motor vehicles and a dip in construction supply.
Inflation Flat in November, Up 0.5% Over Last Year… Energy, food, and apparel dropped while housing and medical services moved higher.
What it means – Excluding food and energy, annual inflation magically hit the Fed’s target of 2% just as the Federal Open Market Committee (FOMC) started debating higher rates. Some things just work out perfectly, at least for them. The drag of falling energy prices should fade in the months ahead, pushing inflation up in the first quarter of 2016.
China Moves Yuan From Dollar Peg to Basket Weighted… In a casual, unsigned press release, the Chinese financial authority noted that compared to a basket of currencies, the Yuan has remained stable. This was taken as notice that the People’s Bank of China will no longer peg the currency to just the U.S. dollar.
What it means – Well, that didn’t take long. After the IMF’s decision on November 30 to include the Yuan in its Strategic Drawing Rights, we noted that it wouldn’t be long before China devalued their currency. Moving the Yuan from lockstep with the dollar to a basket weighting is exactly that, devaluation.
Given the state of the Chinese economy, they need it. The country suffers with slowing growth and an oversupply of housing stock as well as commodities. A cheaper Yuan will make exports more profitable, but probably not enough to offset their other economic issues.
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