The Markets This Week

January 12th, 2015

The stock market was whipsawed last week by volatile share prices, finishing 0.7% lower by Friday’s close. Investors can’t seem to decide if the continuing plunge in oil prices is good or bad for stocks. That uncertainty was partly reflected in half-hearted activity, with volume in the downdraft low and on the rebound even lower, a not particularly encouraging technical sign.

Oil fell 8%, hitting a 52-week low of $47.93 a barrel by Tuesday, and stocks followed. But equities revived when crude edged up later in the week to $48.37. That wasn’t enough to help energy stocks, the worst-performing sector, down 3% last week.
Investors got a lift from comments by Charles Evans, president of the Chicago Federal Reserve. Late Wednesday, he said he wasn’t in favor of raising interest rates until 2016. The Fed is expected to begin hiking in mid-2015.

Last week, the Dow Jones Industrial Average gave up 96 points, or 0.5%, to 17,737.37; and the Standard & Poor’s 500 index lost 13 to 2,044.81. The Nasdaq Composite index retreated 23, or 0.5%, to 4704.07. Bond investors took Evan’s remark to heart, as the yield on the ten-year U.S. note fell below 2% to 1.975%. (Bond prices move inversely to yields.)

“The V-shaped week made it seem like we had a full year’s worth volatility in one week,” says Brian Reynolds, chief market strategist at Rosenblatt Securities. The downside and upside last week was less vigorous than October’s big drop and rebound, says Reynolds. “That tells us there is less investor conviction.” He expects more “violent” ups and downs this year.

Charles Schwab chief investment strategist Liz Ann Sonders also looks for more pullbacks this year and even perhaps a 10% correction, though she doesn’t expect that to “upend” the six-year-old bull market. For some investors at this point in the bull, the “fear of missing out” that fuelled previous snapback rebounds and kept corrections mild is giving way to “fear of losing money.” The willingness to buy on the dips is not as strong as it was, she avers.

Contributing to the rocky 2015 start is uncertainty over the Fed’s path to higher interest rates, she says. Unlike previous Fed tightening courses, this time it’s started from an artificially low level and with an inflated balance sheet.

In the background, there are some tangential factors, adds Reynolds. Worries remain that the European Central Bank will fail to produce a quantitative easing plan later this month that meets investor expectations.

And fears of Greece exiting the European Union could deepen soon. Sunday, Jan. 25, sees a parliamentary election in Greece. The leftist Syriza party, which opposes the country’s international bailout plan and austerity measures, has the lead in pre-election surveys.

(Source: Barrons Online)

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