Last week oil prices plunged, the high-yield bond market unraveled, and stocks registered their worst performance in four months. All of it felt like a prelude to Wednesday, when the Federal Reserve is almost certainly going to raise interest rates for the first time in nine years.
“The withdrawal of Fed policy creates these hissy fits,” said Peter Boockvar, the chief market analyst at The Lindsey Group. “It’s pretty clear everyone expects it to happen, and the decision comes with so much baggage.”
The Dow Jones Industrial Average fell 582 points, or 3.3%, last week to 17,265.21, while the Standard & Poor’s 500 index dropped 79 points to 2012.37. It was the S&P’s steepest drop since August, and left the index in negative territory for the year, down 2.3%. The Nasdaq Composite fell 4.1% to 4933.47.
Just one Dow stock ended the week in the black— DuPont (DD) rose 4% on news that it will merge with Dow Chemical (DOW) to create a $130 billion giant that will eventually split into three companies. The merger could result in DuPont being taken out of the Dow index.
A sharp decline in oil prices helped precipitate the slump. On Friday, the International Energy Agency forecast that supply would stay high and demand would stay low into next year. Crude futures fell $4.35, or 10.9%, on the week, to $35.62 per barrel. Oil stocks fell hard, with ExxonMobil (XOM) off nearly 6%. Smaller energy companies plunged even further, with Chesapeake Energy (CHK) dropping 9% on Friday alone.
The drop in crude also accelerated a selloff Friday in junk bonds, many of which had been issued by energy companies. Two prominent exchange-traded funds that track high-yield bonds fell 2% each.
Investors are so spooked that they are stockpiling greenbacks. In the past week, money-market funds saw $13 billion in inflows, versus $6 billion in outflows from both bonds and equities, according to a Bank of America Merrill Lynch report issued Thursday. Junk bonds saw their largest outflows in 15 weeks, at $3.8 billion.
“The cost of capital is going up for corporate America,” Boockvar said. “Investors are realizing that credit is tightening, monetary policy is tightening, earnings have been weak. It’s all coming together.”
This is the stage onto which Janet Yellen will walk next week. Despite the Fed’s foreshadowing of a rate increase in recent weeks, it still feels momentous, and much hangs in the balance.
(Source: Barrons Online)