What Are These Central Banks Doing? Weekly Update – January 26, 2015

Image courtesy of FreeDigitalPhotos.net/suphakit73

Image courtesy of
FreeDigitalPhotos.net/suphakit73

Markets ended the week in the black for the first time in 2015 on the back of major moves by multiple central banks. For the week, the S&P 500 gained 1.60%, the Dow grew 0.92%, and the Nasdaq added 2.66%.1

Central banks ruled market headlines last week with the European Central Bank, Bank of Canada, People’s Bank of China, and Bank of Japan all making key announcements. The ECB led the pack by announcing its first round of quantitative easing, promising EUR 60 billion in monthly asset purchases. The move is designed to boost the Eurozone economy and fight deflationary pressures, though some experts are dubious about the potential for success.2 In an effort to stem outflows of cash from the Chinese economy, the Chinese central bank used short-term monetary tools to inject more liquidity into the financial system ahead of the Lunar New Year Holiday.3 The Bank of Canada joined the party by announcing a surprise interest rate cut to spur growth in the face of falling oil prices.4

Markets reacted positively to the news that central banks are making an effort to boost the global economy, helping the major indexes post gains for the first time this year. However, the news last week wasn’t all good.

The Eurozone faces another major challenge in Greece; voters went to the polls Sunday and elected the radical left Syriza party, which wants to end austerity measures and refuse European debt inspections. Though it’s unclear if the party has enough parliament seats to form a government, the election result highlights Greek voters’ frustration with austerity and increases the risk of a so-called “Grexit,” a Greek exit from the Eurozone.5

 

The U.S. is also facing new foreign policy challenges. The death of Saudi Arabia’s King Abdullah bin Abdulaziz Al Saud may change America’s relationship with its largest ally in the Middle East and affect global oil markets.6 Yemen, a major Saudi supporter and U.S. ally, also experienced leadership turmoil with the resignation of its president after being besieged by rebel fighters.7 If the political vacuum causes Yemen to splinter along ethnic and religious lines, it could spark civil war, also threatening U.S. policies in the Middle East.

 

Looking ahead, we see a lot of uncertainty this week. Though the U.S. continues to do well, we see markets driven by energy prices, worries about Europe, and concern that new central bank policies may not be enough to stoke economic activity in the rest of the world. Next week’s Federal Reserve Open Market Committee meeting will be key in setting the tone for the year’s monetary policies. Although the Fed has indicated that it may raise rates this year, the increased stimulus measures from its counterparts overseas may make it harder for the Fed to move ahead with rate hikes. Even if global economic policy isn’t part of the Fed’s mandate, the interconnectedness of the world’s economy and the importance of the U.S. dollar in global trade mean our central bankers must take into account global risks when making policy decisions.8 The week ahead is also filled with important earnings reports, which could make or break the Q4 earnings season. Thus far, earnings have been uninspiring, though overall earnings growth is expected to be positive.9

 

When markets turn volatile, it’s important to remain disciplined by sticking to your own financial strategies while staying flexible enough to take advantage of opportunities as they arise. We’re keeping a close eye on market events as they develop and will keep you updated.

ECONOMIC CALENDAR:

Monday: Dallas Fed Mfg. Survey

Tuesday: Durable Goods Orders, S&P Case-Shiller HPI, New Home Sales, Consumer Confidence

Wednesday: EIA Petroleum Status Report, FOMC Meeting Announcement

Thursday: Jobless Claims, Pending Home Sales Index

Friday: GDP, Employment Cost Index, Chicago PMI, Consumer Sentiment

 

Capture
HEADLINES:

Jobless claims fall from 7-month high. Weekly claims for new unemployment benefits dropped last week, erasing the previous week’s increase, which pushed weekly claims to the highest level seen since June. Seasonal factors around holiday hiring are likely to blame for the volatility10

U.S. factory activity slows. The manufacturing sector continued to grow in January, but the pace of activity slowed as new orders weakened. Though some seasonal factors may be affecting data, job creation in the sector remains steady, indicating underlying demand may not have dropped.11

Single-family housing starts to reach multi-year high. Groundbreaking on new single-family homes reached the highest level in 6-1/2 years in December. Though housing activity has lagged in the last year, the new construction trend could indicate greater demand for housing as the economy improves.12

Mortgage applications surge. The volume of mortgage applications increased dramatically last week, pushing total volume 41% higher than the same period last week, in another hopeful sign for the housing sector. Economists cite low mortgage rates and a reduction in Federal Housing Administration mortgage insurance premiums as factors.13

Friday’s “Relief Rally” Weekly Update – January 20, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Stocks experienced another rollercoaster week, pummeled by a dismal global growth forecast and missed earnings reports. However, markets ended a four-day losing streak on Friday with a “relief rally” as energy prices rebounded slightly.1 For the week, the S&P 500 lost 1.26%, the Dow fell 1.27%, and the Nasdaq dropped 1.48%.2

The World Bank underscored investors’ concerns about the global economy by slashing its global growth forecast for 2015 and 2016. Citing disappointing growth in Europe and concerns about some emerging markets, the development organization cut its predicted global economic growth rate to 3.0% from 3.4% in June.3 Though U.S. growth remains strong, slowing demand overseas may hurt U.S. firms.

December holiday sales reports arrived, and the news wasn’t very jolly, showing that overall retail sales dropped 0.9%. Cheaper gas, earlier shopping, and significant discounts all contributed to the drop, and retailers have chosen to call the season a win. The National Retail Federation says that overall holiday spending rose 4.0%, making it the best season since 2011. Investors were less enthusiastic about the data, which could indicate weakness in consumer spending.4

Earnings season shifted into high gear last week, bringing total S&P 500 company reports to 37. So far, the news isn’t great. Financial companies are the first large group to report in, and although there are some individual success stories, the Major Banks sector (which includes companies like JP Morgan, Wells Fargo, and Citigroup) dragging, with earnings down 13.7% since the same time last year. However, outside the Finance sector, the picture is brighter, with total earnings up 17.4% so far on higher revenues.5 Though it’s still early in the season, S&P Capital IQ predicts that overall earnings for the S&P 500 increased 6.5% in the fourth quarter.6 Though the U.S. demand picture appears to be strengthening, external factors like oil prices and the dollar’s strength relative to other currencies is likely to significantly affect company performance this year.

Does January’s rocky start bode ill for the rest of 2015? Probably not. Right now, Wall Street is preoccupied with the murkiness of recent data. Macro issues like oil prices, the dollar’s strength, central bank moves, and global growth forecasts are overriding individual company data, which makes it hard to pick winners and losers. Fundamental trends within the U.S. economy haven’t changed: U.S. firms are hiring, Americans are more confident about their prospects, and many sectors of the economy are showing improvement. Markets are closed on Monday, but the week ahead is filled with more earnings reports as well as Tuesday’s State of the Union address by President Obama.

ECONOMIC CALENDAR:

Tuesday: Housing Market Index

Wednesday: Housing Starts

Thursday: Jobless Claims, PMI Manufacturing Index Flash, EIA Petroleum Status Report

Friday: Existing Home Sales

Capture
NY Post Twitter feed hacked, traders respond.
Investors were shocked when the New York post tweeted Friday that the Federal Reserve was holding an emergency meeting to set interest rates. Though the paper quickly regained control of the Twitter account and deleted offending tweets, some traders may have responded to the news. Lessons? Don’t believe everything you read.7HEADLINES:

Swiss franc soars after 1.20 euro peg dropped. The central bank of Switzerland abandoned a 3-year-old currency agreement by dropping the floor on the Swiss franc Thursday, allowing it to float freely against the euro. Traders responded by rushing for the euro exits, buying Swiss francs and pushing the currency 30% higher against the euro.8

U.S. import prices post record drop in December. The cost of U.S. imports fell by the largest amount since 2008 as petroleum costs continued to plunge. Import prices fell by 2.5% in December, dropping 5.5% for all of 2014. Weak import inflation may help stave off Fed rate hikes.9

U.S. foreclosures down 64% from 2010 peak. The number of foreclosed U.S. homes fell again in November, bringing monthly foreclosures down 64% since the peak in September 2010. Though foreclosure activity is falling, analysts believe it won’t reach normal levels for at least two years as distressed loans continue to move through the system.10

How Should I Start Saving for My Kids Education

Image courtesy of FreeDigitalPhotos.net/hywards

Image courtesy of
FreeDigitalPhotos.net/hywards

The other day, I (Tony) got an email from a long lost friend of mine that I hadn’t chatted with in years.  He knows I’m in the industry and he reached out to me with an email question that I thought our blog readers might find of interest.  Turns out, he and his wife had a daughter about a year ago and they were thinking through what type of account would be the best way for them to save for her college education.  Below is my abridged reply.

“It’s great to hear your desire of being a good steward of your family and finances.  Unfortunately, your question isn’t as easy as one might think.  We typically look at a variety of ‘first steps’ that we believe should be in place before beginning to fund a college goal.  First, do you have a Will in place?  A Will should be developed that would name an Executor of your Estate and your desired caretaker of your kids in the unfortunate event of you and your wife’s death.  It would be a travesty to allow the courts to decide who would care for your daughter.  You should have a Will fully executed before beginning to fund your college goal.  These aren’t outrageously expensive, but they aren’t cheap either.  You’ll need to seek and find a qualified attorney to draft a Will for you and your wife.

Next, you should have adequate life insurance in place.  In the unfortunate circumstance of your death, you’ll want to leave your wife and daughter adequate income to survive.  Future college costs can be worked in to the equation of adequate life insurance amount.  Further, if you and your wife should both die at the same time, your chosen care-takers of your daughter will be grateful that money is available to help raise your daughter over the long term.

Third, you should establish and fully fund an Emergency Fund.  We recommend 3-6 months of your living expenses to be set aside in this account to be used for emergencies.  While saving for your daughter’s college is a noble cause, if you lose your job or some catastrophic event causes you to have a large outlay of cash, you’ll want to make sure your family’s needs are met first for the here and now…in which an Emergency Fund could be used.  Once money is in a college savings type account, you will be unable to take the funds back out of it without penalty.

Fourth, it is to your advantage as well to ensure that you and your wife’s retirement is a primary consideration above college contributions.  The main reason is that you may put your own retirement at risk by not funding it fully, only to find out your daughter receives a hefty scholarship or perhaps doesn’t even go to college for various reasons.  I’ve dealt with too many clients who have put their own retirement in jeopardy to send their kids to college and are now living with regret and having to work for longer than they had ever anticipated.

Next, it is to your advantage to make sure you’ve dealt with any consumer debt that is outstanding.  High interest rate student loans, auto loans or credit cards will kill you financially over time.  It is recommended that you extinguish most, if not all, consumer debt (not mortgage) before considering funding a child’s college education.

Last, but not leastJ, if these other financial considerations are in order, you could consider college contributions.  We typically steer clients to CollegeAmerica which is Virginia’s 529 Plan managed by American Funds.  This Plan is only available through advisors.  American Funds has a robust line-up of target date offerings and has had stellar performance.

For those living in Ohio and not working with an advisor, consider Ohio’s 529 Plan.  www.collegeadvantage.com  Choose the Do-It Yourself Direct Plan.  You can sign up everything online and do your contributions via EFT from your bank account.  Choose an age-based option that will vary in risk as the child gets older.  The closer they get to college, the less risk the model will take.  Also, Ohio’s plan allows for a small tax credit that many find helpful in tax planning considerations.

For more information of which I pretty much agree with, visit www.daveramsey.com  He lays out many of the principles I’ve written above in book form.  Also, a lot of times there are live classes in the area in which you can attend.  You can search for those and you and your wife can learn more.”

Hixon Zuercher January 2015 Monthly Video Update

Perspectives On a Volatile Week Weekly Update – January 12, 2015

Image courtesy of FreeDigitalPhotos.net/Stuart Miles

Image courtesy of
FreeDigitalPhotos.net/Stuart Miles

Stocks ended the first full week of 2015 in the red, pulled in different directions by a mixed December jobs report, fresh oil declines, and renewed terrorist fears in the West. For the week, the S&P 500 lost 0.65%, the Dow fell 0.54%, and the Nasdaq slid 0.48%.1

The December employment report was released on Friday and it has both good news and not-so-good news. Preliminary data shows that the economy added 252,000 jobs last month, bringing the total new jobs for 2014 to 2.95 million. The headline unemployment rate dropped to 5.6%.2

While the jobs growth is good news for continued economic growth in 2015, investors are worried about a lack of wage growth, which could put a damper on consumer spending. This prolonged absence of wage growth is perplexing. As the number of available jobs rises and the pool of unemployed Americans shrink, Econ 101 teaches us that employers should be forced to raise wages to attract and keep qualified employees. However, this doesn’t seem to be happening. Inflation-adjusted hourly pay actually fell 0.2% between November and December and ended 2014 just 1.7% higher.3

Why is wage growth so slow? One theory developed by economists at the Federal Reserve Bank of San Francisco posits that “downward wage rigidity,” the reluctance of employers to reduce wages in the recession, has created a backlog of pay cuts that’s causing many employers to hold back on raises. Until the labor market tightens much more, stagnant wages are likely to remain.4

So, in the overall calculus of the economy, more new jobs = good, but frozen wages = not so good.

Oil prices continued to plunge last week. Benchmark Brent crude dropped below $49 a barrel, but closed above $50 on news that the number of U.S. drilling rigs had dropped significantly.5 The fallout from cheap oil for some North American oil producers, many of which rely heavily on debt to fund projects, is already being felt; Shell announced layoffs of up to 10% of the workforce of an Alberta tar sands project.6 A small Texas oil producer filed for bankruptcy protection last week after being turned down for financing by a lender.7 Given how reliant on credit many oil and gas producers are, more bankruptcies may follow in the weeks and months ahead. If small producers are squeezed out of the market, it could allow oil prices to climb back up to the levels preferred by OPEC nations.

On Wednesday, Charlie Hebdo, a satirical weekly newspaper in Paris, was attacked by three gunmen who killed 12 employees.8 Gunmen later attacked a kosher grocery, killing four others.9 Our thoughts are with the victims’ families and the Paris community as they grapple with the aftermath of these horrific attacks.

The week ahead is heavy with economic data, including reports on retail sales for December and business inventory spending. A significant number of earnings reports are also due to be released, giving investors something other than macro-economic headlines to consider.

ECONOMIC CALENDAR:

 

Tuesday: JOLTS, Treasury Budget

Wednesday: Retail Sales, Import and Export Prices, Business Inventories, EIA Petroleum Status Report, Beige Book

Thursday: Jobless Claims, PPI-FD, Empire State Mfg. Survey, Philadelphia Fed Survey

Friday: Consumer Price Index, Industrial Production, Consumer Sentiment, Treasury International Capital

Capture

HEADLINES:

Automakers end 2014 with gains. Falling oil prices contributed to solid sales numbers for U.S. automakers, helping each company close out December with better results than December 2013. Trucks seem to be back in vogue as consumers take advantage of lower gas prices to buy less fuel-efficient vehicles.10

U.S. trade imbalance falls to 11-month low. The bill for U.S. imports fell in November as lower oil prices reduced transportation costs. The report caused economists to revise their estimates of fourth-quarter GDP growth to as much as 3.5%.11

Federal Reserve FOMC minutes highlight differences in opinion. The official minutes of the Federal Reserve Open Market Committee meeting in December showed that though the Fed doesn’t plan to raise interest rates until at least mid-April 2015, some committee members feel the central bank shouldn’t commit itself to any particular timeline.12

Retailers shutting stores due to demographic and competitive pressure. Retailers like RadioShack, J.C. Penney, Macy’s, and Wet Seal are laying off workers and closing stores. The companies cite increased competition from online retailers, demographic shifts away from suburbs, and changing consumer preferences as reasons for the closures.13

15 Financial Resolutions for 2015

Image courtesy of FreeDigitalPhotos.net/noppasinw

Image courtesy of
FreeDigitalPhotos.net/noppasinw

As 2014 comes to a close, it’s time to start thinking about how to make 2015 a success for you and your loved ones. Though there’s little consensus about their origins, we know that Americans have been making New Year’s resolutions since at least the 1770s. In 2013, 54% of Americans made resolutions about their finances.

Here are 15 financial resolutions to help make 2015 healthy, happy, and successful:

  1. Set aside emergency savings

Emergencies are unpredictable, and a serious illness or sudden financial need can derail your finances. Prepare for unpredictable expenses by putting aside three to six months of expenses in an easily accessible cash-equivalent account.

  1. Make a budget and stick to it

Budgets may sound like a lot of unnecessary work, especially if you’re financially comfortable, but it’s quite easy to let your spending go off the rails if you’re not tracking it in some way. Contact us if you’d like some tips on making budgeting hassle-free.

  1. Spend less and save more for the future

Most Americans could stand to put more money away for the future. We recommend keeping separate “buckets” of savings for short-term and long-term goals and leveraging tax-advantaged accounts where possible. Let us know if you’d like help saving for specific goals so that we can help ensure you have the right strategy for your needs and timeline.

  1. Make retirement plan contributions regularly

We believe that “time in the market” is critical to long-term investing success. Instead of waiting until the last minute to make your annual contributions, give your money more time to grow by making automatic contributions to your accounts every month.

  1. Maximize your retirement plan contributions

Tax-advantaged retirement accounts are one of the most powerful tools in your financial arsenal. Make the most of them by contributing as much as you can each tax year. We usually recommend maxing out employer-sponsored plans first in order to take advantage of any matching contributions your employer may offer. Give us a call if you need help understanding your retirement account options.

  1. Pay down debt, especially high-interest credit card debt

High-interest debt can make it very hard to get ahead financially. If you’re carrying significant debt, make it a priority to pay down the debt and get out from underneath high interest payments.

  1. Set goals for the future and work with a professional to create strategies to help you work towards them

In our experience, people who set goals for themselves and create strategies to pursue them are much more likely to see success. One study found that investors who leveraged specific financial strategies saw greater long-term financial success. Sit down with your loved ones to discuss your financial goals; when you’re ready to discuss your thoughts, call our office to schedule a no-obligation consultation.

  1. Create a legacy that makes a difference in the world

We believe that a rich life is about more than financial success and a comfortable lifestyle. Whether you want to leave something to your loved ones, or contribute to causes close to your heart, take time to think about the legacy you will leave for the future.

  1. Review your estate planning and legal documents

Your core legal documents should be reviewed regularly to make sure that they keep up with your life. If it’s been a few years since you took a look at your documents, dust them off and make sure that they still represent your wishes.

  1. Review the beneficiaries of your financial accounts and insurance policies

Most Americans have a significant number of financial accounts that they have accumulated over the course of their life. Take the time to gather up your account documents and make sure that the beneficiary information is still current; remember, beneficiary provisions are independent of your will or other estate provisions.

  1. Take care of your health

Healthcare is a major expense for many Americans, especially when serious illness strikes. Take steps to protect your health (and your wallet) by living a healthy lifestyle and being proactive about preventative care. 

  1. Protect your credit

Identity theft and financial fraud are serious threats that can compromise your financial wellbeing. Protect yourself by reviewing financial statements and bills carefully for unauthorized activity. Check your credit report for free at www.annualcreditreport.com.

  1. Review your tax strategies for potential savings

Recent changes to tax laws mean that you may be paying too much in taxes this year. Give us a call to discuss tax strategies that may help you reduce your tax burden.

  1. Involve your spouse and loved ones in your finances

If you (or your spouse) don’t get involved in the family finances, it’s time to start. Work together to make financial decisions and make sure that each of you understands the overall game plan for your finances. At a minimum, make sure that your loved ones know the location of financial accounts and understand your wishes.

  1. Keep your resolutions!

One study found that just 8% of New Year’s resolutions are actually kept. Improve the chances that you will keep your resolutions by making your goals simple, concrete, and actionable. Instead of saying: “I will save more for the future in 2015,” say: “I will contribute $4,500 to my retirement accounts by December 31, 2015” or “I will pay off $2,000 of credit card debt by April 15.”

As 2014 draws to a close, we would like to extend our thanks for the trust and confidence our clients have placed in our firm. Our clients made this year one to remember and we are sincerely grateful for the privilege and opportunity to serve. We look forward to serving you and yours for many years to come.

If you have questions about your future or would like some support in keeping your financial resolutions, please give us a call. Together, let’s make 2015 a success.

S&P 500 Gain: Biggest In Nearly 2 Years. Erases December Losses. Weekly Update – December 22, 2014

Image courtesy of FreeDigitalPhotos.net/sscreations

Image courtesy of
FreeDigitalPhotos.net/sscreations

Markets ended a rollercoaster week on an upbeat note, giving the S&P 500 its biggest weekly gain in nearly two years and erasing December losses.1 Markets were pulled in different directions by several factors, including central bank actions, a deep slide in the Russian ruble, and further gyrations in oil markets. For the week, the S&P 500 gained 3.41%, the Dow grew 3.03%, and the Nasdaq added 2.40%.2

Falling oil prices stoked additional volatility last week as investors grappled with the potential effects of cheap oil. Oil fell for the fourth straight week, ending with U.S. benchmark WTI at under $60/barrel.3 Gasoline prices followed the decline, putting the national average at $2.409 on Sunday.4 Domestically, low gas prices are a net win for U.S. consumers who suddenly have more discretionary income to spend.

However, Russia, one of the world’s major oil producers, felt the sting of falling oil prices. The Russian economy, which has been battered by economic sanctions over Ukraine, is in real trouble. Nervous currency traders caused a run on the Russian ruble, which fell an alarming 19% within one 24-hour period last week.5. Russia’s sinking economy is potentially a threat to its major trading partners, who depend on Russian demand for their goods. One report indicates that one in eight German companies are considering a withdrawal from Russia because of the risk represented by its unstable economy.6 A deteriorating economic situation could also escalate geopolitical tensions over the Ukraine.

Investors cheered at the news that the Federal Reserve is likely to hold interest rates low for at least the first few months of 2015.7 Though the Fed feels confident enough about economic growth to raise rates next year, policymakers intend to remain “patient” by taking a slow approach to rate hikes.8 To translate: The Fed thinks that the economy is on track but doesn’t want to spook investors by hiking up rates too soon.

Looking ahead, it’s hard to know which way markets will go in the final weeks of the year. Historically, December has been a good month for equities, and stocks could be poised to go higher.9 In the plus column, the Fed promises continued low rates, plunging gas prices are putting more dollars in consumers’ wallets, and spirits about the future are high. In the minus column, investors could be jittery about the knock-on effects of falling oil and may be feeling uncertain about 2015.

As 2014 draws to a close, we want to thank you for the privilege of serving you this year. We are honored by the trust you place in our firm and sincerely appreciate the opportunity to work with you. We are excited about what 2015 will bring and look forward to continuing to support you and your family for many more years to come.

ECONOMIC CALENDAR:

Monday: Existing Home Sales

Tuesday: Durable Goods Orders, GDP, Personal Income and Outlays, FHFA House Price Index, Consumer Sentiment, New Home Sales

Wednesday: Jobless Claims, EIA Petroleum Status Report

Thursday: U.S. Markets Closed for Christmas Holiday

Capture

HEADLINES:

Weekly jobless claims fall. Claims for new unemployment benefits and the four-week moving average both fell last week, indicating that the labor market is doing well in the fourth quarter.10

Service sector growth slows in December. Activity in the service sector – which contains industries like financial services, retail, and food service – grew at the slowest rate since February. Slow growth could take a bite out of fourth-quarter economic growth.11

Inflation falls most in six years in October. Domestic prices for goods and services fell by the most in six years as gasoline prices plummeted. However, stripping out volatile food and fuel prices, core consumer prices edged slightly up.12

Mortgage rates fall, but buyers don’t bite. Mortgage rates dropped to their lowest level since May 2013, but homebuyers don’t seem to be interested. The takeaway? Though interest rates may rise next year, lower mortgage rates can still be found.13

Special Update: The Oil Price Decline in 4 Charts Weekly Update – December 15, 2014

Image courtesy of FreeDigitalPhotos.net/Jetkasettakorn

Image courtesy of
FreeDigitalPhotos.net/Jetkasettakorn

Markets were jarred by plummeting oil prices last week, giving the Dow and S&P 500 their worst weeks of 2014.1 For the week, the S&P 500 lost 3.52%, the Dow fell 3.78%, and the Nasdaq dropped 2.66%.2

Markets reacted badly to crude oil’s slide largely because of its economic implications for oil producers like Russia. What’s bad for Russia is bad for its largest trading partner – Europe. Though the U.S. economy is doing well, economic troubles in Europe could be potentially bad for U.S. companies.3

Though it can be depressing to experience a market drop so close to the end of the year, there may be a silver lining to oil’s decline. In this week’s update, we’re taking a look at some of the short- and long-term factors behind the drop in oil prices.

Since June, the price of Brent crude, one of the most commonly used crude oils, has fallen from a high of $115.19 to the current low of $65.64.4

Capture

In the short term, the rise of the United States as an oil-producing power has pushed up global oil supplies, thus depressing oil prices.

Capture

In November, the Organization of the Petroleum Exporting Countries (OPEC), an international group that coordinates oil production between members to stabilize prices, met to determine production quotas. While the group, whose members control 40% of global oil supplies, could have acted to reduce the oil glut by cutting production, they voted to maintain current production levels, sending oil prices even lower.5 While it may seem crazy, it’s likely that OPEC members are seeking to drive smaller producers out of the market.

On the other side of the equation, economic growth in many major oil markets is stalling, reducing the demand for oil. Developed countries have also made major strides in reducing energy use and increasing efficiency. All this spells declining demand in many markets. Global oil consumption estimates have been cut four times this year as the oil industry struggles to come to grips with changing fundamentals.6

Capture

Other long-term factors may affect future oil demand. Economists predict that U.S. gasoline consumption will flatten and contract in coming years.7 Demographic trends in the U.S. suggest that domestic demand may fall as baby boomers retire and reduce their driving; Millennials, members of the largest generation in U.S. history, are moving to cities and using alternative transportation in increasing numbers. Use of renewable energy sources is also on the rise and expected to continue, though cheap oil may make alternative energy less fiscally appealing.

What does cheap oil mean for the U.S.?

On the positive side, lower prices will likely boost consumer sentiment and increase discretionary spending, which is great news for U.S. businesses. Based on U.S. Highway Administration estimates, this year’s gas price drop has translated into over $1,000 in annual savings for the average American household.8

On the other hand, the U.S. is becoming a serious oil producer and low prices are bad news for domestic oil producers. The economic viability of U.S. shale oil production (the source of its recent oil boom) relies on high oil prices to offset expensive extraction. One metric used by energy analysts is the “breakeven price,” which is the oil price needed for projects (or producers) to make a healthy return. Can shale oil producers survive in a world of dirt-cheap oil? Opinions differ; the chart below shows the estimated breakeven price for several shale oil projects.

Capture

While some projects may be able to survive low oil prices, one estimate puts the average breakeven price of U.S. shale projects around $65-$70/barrel, indicating that many are vulnerable to low oil prices.9

Globally, oil price instability and continued downward pressure could mean bad news for major producers like Saudi Arabia and Russia that depend on oil revenues to make debt payments. While some countries have large cash reserves that will help cushion the effects of cheap oil, the long-term economic effects could be serious.

Bottom line: How Low Can Oil Go?

Well, that’s the trillion-dollar question and everyone has a guess. Government energy economists are currently forecasting an average price of $68/barrel on Brent Crude, though they admit there’s a great deal of uncertainty in price forecasts right now.10

Are oil and gasoline prices going to remain this low? Hard to know. The prices we are seeing are partially the result of speculation and bearish sentiment on oil. While fundamentals suggest oil prices will remain depressed in 2015, it’s unlikely that $2.00 gas is here to stay.11 Let’s make the most of it while we can.

Looking ahead, we can expect additional market volatility as traders take a look at their portfolios after last week’s rout. Wednesday’s Federal Reserve Open Market Committee meeting will also be in focus; analysts hope that the Fed will address how the recent drop in oil prices may affect the timing of future interest rate increases.

 

ECONOMIC CALENDAR:

Monday: Empire State Mfg. Survey, Industrial Production, Housing Market Index

Tuesday: Housing Starts, PMI Manufacturing Index Flash

Wednesday: Consumer Price Index, EIA Petroleum Status Report, FOMC Meeting Announcement, FOMC Forecasts, Chair Press Conference 2:30pm

Thursday: Jobless Claims, Philadelphia Fed Survey

Capture

HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Congress passes $1.1 trillion spending bill. After weeks of closed-door haggling and bitter partisanship, Congress passed a budget bill, funding most government agencies through September 2015 and avoiding a government shutdown.12

Retailers bounce back from Black Friday. Despite a slow Thanksgiving shopping period, new data shows that November sales increased by 5.4% over last year for brick-and-mortar stores.13

China’s economy may slide to 7.1% growth in 2015. The Chinese central bank announced that a slack domestic real estate sector could cause China to miss growth forecasts. Though China’s export sector is still growing, it’s not enough to offset the weak property sector.14

Weekly jobless claims fall. Initial claims for state unemployment benefits fell again, though continuing claims increased. The four-week moving average edged upward, though it remained below 300,000 for the 13th straight month.

December 2014 Monthly Video Update

The Clues Within November Jobs Report Weekly Update – December 8, 2014

Image courtesy of FreeDigitalPhotos.net/jscreationzs

Image courtesy of
FreeDigitalPhotos.net/jscreationzs

Markets ended the first week of December with a bang, rallying for the seventh straight week, though the Nasdaq gave in to selling pressure and closed slightly down. Investors used an upbeat November jobs report as an excuse to rally, giving the Dow another record close for the year. For the week, the S&P 500 added 0.38%, the Dow grew 0.73%, but the Nasdaq fell 0.23%.1

The November jobs report showed that the economy gained 321,000 new jobs last month, though the unemployment rate held steady at 5.8%. Job growth was widespread, showing improvement in several sectors of the economy.2

Another report supported the view that the labor market is making great strides. Americans quit their jobs in greater numbers in September than in any period since April 2008. Voluntary separations are a sign of increased dynamism in the labor market as workers quit to take advantage of better opportunities. Young employees are among the most aggressive job-switchers; many that were forced to take low-paying jobs early in the recovery are taking better positions. Employers, who have long held the upper hand, are scrambling to keep key workers, and recruitment for many in-demand areas is up.3

What does this mean for the economy? Hopefully, higher incomes, increased upward mobility, and higher consumer spending. We may also see increased demand in the housing market as household formation among young Americans – which dropped precipitously during the recession – picks up.4

Black Friday numbers came in last week and showed that spending over the Thanksgiving weekend unexpectedly dropped about 12% over last year.5 While the results are quite puzzling, given the general improvement in consumer fundamentals, research shows that Black Friday trends are not strongly correlated with overall holiday season shopping.6 Though the early numbers are a bit of a disappointment, there’s still room for a solid retail season.

 

ECONOMIC CALENDAR:

Tuesday: JOLTS

Wednesday: EIA Petroleum Status Report, Treasury Budget

Thursday: Jobless Claims, Retail Sales, Import and Export Prices, Business Inventories

Friday: PPI-FD, Consumer Sentiment

Capture

HEADLINES:
Notes: All index returns exclude reinvested dividends, and the 5-year and 10-year returns are annualized. Sources: Yahoo! Finance and Treasury.gov. International performance is represented by the MSCI EAFE Index. Corporate bond performance is represented by the DJCBP. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly.

Gas prices fall below $2.00/gallon. Pump prices for regular unleaded plummeted across the nation, dropping below $2.00/gallon in Oklahoma. With prices this low, the spread between area prices is growing; Hawaiians have the highest average prices at $3.883.7

Factory orders fall for third straight month. New orders for factory goods fell in October for the third month in a row, indicating that manufacturing activity may have slowed down in the fourth quarter.8

Federal Reserve Beige Book report optimistic about economy. The Fed’s assessment of economic conditions across the country in October and November shows important gains in business conditions and employment, though the housing market remains an area of concern.9

Black Friday deal making drives auto sales. U.S. sales of light vehicles grew 5% year-over-year in November, driven by attractive deals, lower gas prices, and increasing wages. Though the November volume may chip away at December sales, the fundamentals are in place for a solid quarter for automakers.10