Stocks Sink on Oil and Fed Anticipation

Market Overview

Fed Anticipation
Sources: Equity Market, Fixed Income and REIT returns from JP Morgan as of 12/11/15. Rates and Economic Calendar Data from Bloomberg as of 12/14/15.

Happening Now                   

The S&P 500 Index fell 3.74% last week as oil prices traded lower and investors kept focus on this Wednesday’s upcoming Federal Reserve (Fed) Interest Rate announcement. West Texas Intermediate (WTI) oil prices finished the week at $35.61 a barrel, fueling concerns that stubbornly lower energy prices may translate to weak economic growth. While not ignoring the fact that the U.S. and Global economies face a multitude of challenges in an unprecedented economic climate, we continue to believe that oil is a supply side story. Low interest rates, increasing wages, lower unemployment and cheaper prices at the pump should benefit consumers and allow them to spend more in 2016 (and perhaps this holiday season). Since consumer spending makes up the vast majority (i.e. 2/3) of U.S. Gross Domestic Product (GDP) and considering the tailwinds mentioned above, there is a strong case to be made for continued economic growth in the coming year.

Economic growth, however, is not necessarily correlated to positive stock returns. As of Tuesday December 14, the S&P 500 Index was down 1.8% for 2015 despite the U.S. economy expanding at an estimated rate of 2.5% this year1.

As time winds down on 2015, investors should begin to position themselves for what will likely be a volatile environment for stocks in 2016 with the market continuing to hang on the outcome of the Fed’s eight scheduled meetings. While Asset Allocation is often cited as being the largest determinant of long term performance, security selection can also play a key role in volatile markets and significantly affect shorter term performance. This is perhaps best highlighted by looking at the difference between the ten best and ten worst performing stocks in the S&P 500 so far in 20152. The median return of the ten best performing companies is a staggering 60% while the median return of the ten worst performing companies is -66%! This spread is due not only to the individual securities but also to the sectors the companies operate in.

1. JP Morgan estimate as of 12/11/2015
2. Data from as of 12/15/2015

Important Information and Disclaimers

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MSCI- EAFE: The Morgan Stanley Capital International Europe, Australasia and Far East Index, a free float-adjusted market capitalization index that is designed to measure developed-market equity performance, excluding the United States and Canada.

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Russell 3000: The Russell 3000 measures the performance of the 3000 largest US companies based on total market capitalization and represents about 98% of the investible US Equity market.

ML BOFA US Corp Mstr [Merill Lynch US Corporate Master]: The Merrill Lynch Corporate Master Market Index is a statistical composite tracking the performance of the entire US corporate bond market over time.

ML Muni Master [Merill Lynch US Corporate Master]: The Merrill Lynch Municipal Bond Master Index is a broad measure of the municipal fixed income market.

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LIBOR, London Interbank Offered Rate, is the rate of interest at which banks offer to lend money to one another in the wholesale money markets in London.

The Dow Jones Industrial Average is an unweighted index of 30 “blue-chip” industrial U.S. stocks.

The S&P Midcap 400 Index is a capitalization-weighted index measuring the performance of the mid-range sector of the U.S. stock market, and represents approximately 7% of the total market value of U.S. equities. Companies in the Index fall between S&P 500 Index and the S&P SmallCap 600 Index in size: between $1-4 billion.

DJ Equity REIT Index represents all publicly traded real estate investment trusts in the Dow Jones U.S. stock universe classified as Equity REITs according to the S&P Dow Jones Indices REIT Industry Classification Hierarchy. These companies are REITSs that primarily own and operate income-producing real estate.