The pace of drilling new oil wells in the U.S. has slowed dramatically due to lower oil prices and the perceived risk that oil prices may crash again. The U.S. rig count (the number of drilling rigs in use in the U.S.) has dropped from 1,811 on 1/1/2015 to 406 rigs on Friday. That is a drop of 78%.
Many oil experts feel the reason for the oil price crash in 2014 and 2015 stems from new U.S. production this decade. The new U.S. production resulted in too much oil production worldwide. Now, with the downturn in drilling activity in the U.S. it is no wonder why oil prices have been trending up in 2016 (Source: Baker Hughes).
Most of the time, the U.S. stock market looks to 3 factors (call them the “pillars” which support the stock market) to support its upward trend – let’s grade each of the pillars.
CONSUMER SPENDING: This grade is A- (very favorable).
THE FED AND ITS POLICIES: This factor is rated B (favorable). The U.S. economy can handle higher rates as long as the pace of future interest rate increases is slow. Fed Chair Janet Yellen made clear in her press conference after the December meeting that the path higher would be “gradual”.
The Fed’s plan to gradually raise rates in the coming years won’t derail the economy and brings some certainty to the market, says Morningstar’s Bob Johnson.
BUSINESS PROFITABILITY: This factor’s grade is aC-(below average). So far, first quarter corporate-earnings reports weren’t as bad as anticipated but certainly nothing to write home about.
OTHER CONCERNS: The “Heat Map” is indicating the U.S. stock market is in OK shape ASSUMING no international crisis. On a scale of 1 to 10 with 10 being the highest level of crisis, we rate these international risks collectively as a 3. While decreased, these risks still deserve our ongoing attention.
Last week, U.S. Stocks and Foreign Stocks declined. During the last 12 months, BONDS outperformed STOCKS.
Returns through 5-13-2016
1-week
Y-T-D
1-Year
3-Years
5-Years
10-Years
Bonds- BarCap Aggregate Index
.3
3.9
4.2
2.7
3.6
5.1
US Stocks-Standard & Poor’s 500
-.4
1.0
-.3
10.1
11.3
7.0
Foreign Stocks- MS EAFE Developed Countries
-.3
-3.5
-13.4
.1
1.8
1.1
Source: Morningstar Workstation. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three, five and ten year returns are annualized excluding dividends.
The show airs on WDIY Wednesday evenings, from 6-7 p.m. The show is hosted by Valley National’s Laurie Siebert CPA, CFP®, AEP®. This week Laurie and guest host Attorney Charles Stopp will discuss: “Real estate topics including conservation, titling, transferring and estate implications”
Laurie and Attorney Stopp will take your calls on these topics and other inquiries this week. Questions may be submitted early through www.yourfinancialchoices.com by clicking Contact Laurie. This show will be broadcast at the regular time. WDIY is broadcast on FM 88.1 for reception in most of the Lehigh Valley; and, it is broadcast on FM 93.9 in the Easton and Phillipsburg area– or listen to it online from anywhere on the internet. For more information, including how to listen to the show online, check the show’s website www.yourfinancialchoices.com and visit www.wdiy.org.
Stocks fell last week on concerns about U.S. retailing, commodity-price weakness, credit data in China, and a stronger dollar. The last hurt large-capitalization stocks, costing the Dow Jones Industrial Average 1.2%.
Investors were perplexed when the Commerce Department said Friday that April retail sales had jumped 1.3%, right after several big department-store operators had reported poor first-quarter numbers. Separately, consumer sentiment in early May improved sharply, data showed.
Macy’s (ticker: M), Kohl’s (KSS), and J.C. Penney (JCP) all reported much lower first-quarter sales last week, and offered generally unappetizing guidance. The department-stores group slumped 16%, with Macy’s down 17%, to $31.21.
The greenback, which has been soft this year, began to move up again in May. That hurt shares of big companies, which tend to have substantial overseas sales. The Dow industrials lost 205 points on the week, to 17,535.32. The Standard & Poor’s 500 index fell 10.5 points to 2046.61, and the Nasdaq Composite dropped 0.4% to finish at 4717.68.
The retail data seem to point up a shift in consumer dollars from malls to online spending, says Brian Lazorishak, a portfolio manager with Stack Financial Management in Whitefish, Mont. While some investors took solace from the surprisingly positive government figures, bears noted the numbers measured the past, while the downbeat guidance from department stores was forward-looking.
Chinese steel futures fell more than 10% last week and are down about 25% from a peak in April, and there are signs the selloff is spreading to other global markets and other commodities. Additionally, Chinese credit data showed a sharper drop than expected in April in most lending categories.
The market has been trading in a range around 2100 for a while, and “looks as if it is struggling for additional multiple expansion” to push up the indexes, says John Brady, a sales trader at R.J. O’Brien. He sees the market moving sideways short-term, with the Federal Reserve ever ready to prop it up with dovish talk about rate-hike expectations.
Lazorishak says there is enough technical strength to give the rally the benefit of the doubt, but it looks like it is running out of steam just as the market enters a traditionally weak season.
