Crude Drags Equities

The Story is ENERGY.

My call to remain engaged and to not panic in Friday morning’s note (Look past the ECB) was validated by the massive rally that materialized when markets opened on Friday. Markets reversed higher on Friday in a breath taking move. All three majors left Thursday’s sharp move lower in the distance. The Dow Industrials (+2.10%), S&P 500 (+2.03%) and NASDAQ (+2.08%) regained all the ground lost on Thursday – and then some. Volume was not however commensurate with the move. The NYSE volume (-1.48%) and NASDAQ volume (-13.55%) both left students of the market and investors with a longing for confirmation.

Friday’s employment data fueled a massive move higher and confirmed my suspicions that the employment picture not only continued to improve in November, but has actually improved from the soft patch we saw in the data in mid-Autumn. Consensus was expecting a gain of 190k jobs. The range was 160k-219k. The actual was 211k – at the high end of the range. The internals of the employment report were equally as encouraging.

Private Payrolls grew by 197k
The Participation rate slide .1% higher to 62.5%
Average Hourly Earnings change M/M was 0.2%
Average Hourly Workweek remained unchanged at 34.5 hrs.
The unemployment remained 5%.

The data was solid and yet did not move the official unemployment rate below 5%. It conforms very neatly to the narrative laid out by Federal Reserve Chair Janet Yellen and simultaneously provides investors with a degree of confirmed confidence that our economy is continuing to expand at a sustainable rate despite the hurdles that have been brought to bare in recent months.

In an earlier note this week I wrote: “As I have indicated this week, a coordinated move by the Saudis would likely be the only factor that had the potential of stemming crude’s selloff.”

One of the hurdles that has become increasingly taller has been the sharp contraction in crude prices. Last Friday’s OPEC meeting in Vienna may prove to have been one of the most important meetings of its kind in history. In a meeting that was initially scheduled to last four hours, all appearances of Saudi control and OPEC unity collapsed. The singular goal that was agreed upon by OPEC was the one that had few detractors – keep producing oil – regardless of price in an effort to retain and in some cases re-capture market share. This policy, which has been in effect for a year, will continue to weigh heavily on the energy sector. As a result, it will also act as a drag on the overall market due to the weighting of the energy sector in the S&P 500.

If you remove the energy sector from the S&P 500 in 2015, earnings rose by roughly 7% in an economy that expanded by roughly 3%. We should see some of the recent hyper-volatility drained from pricing, but will likely see some continued pressure on crude well into 2016. Crude WTI will likely break $40.00/bbl in a meaningful way in the first quarter of 2016 and, as a result, should dampen index performance in a year that will probably see earnings growth of nearly 10% and economic expansion of roughly 3% once again.

The Economic Calendar is relatively light today. Labor Market Conditions will dominate the narrative as will the growing anticipation of the Fed’s first move towards normalization.

Flickr Photo: Images_of_Money