Investment Commentary – December 10, 2014

Dow – 17,533.15 (12/10/14 close)
S&P 500 – 2,026.14 (12/10/14 close)
10-year Treasury – 2.16% (12/10/14 close)

  • After 4 years when oil prices routinely ran more than $100 per barrel, it seemed like high energy prices might never go away. It was getting harder to find and develop new oil fields, and the dramatic growth in China and other emerging-market countries was driving demand, or so the thinking went. But this year, the picture looks dramatically different.
  • Oil has cratered more than 42% from its June highs. The drop in oil prices came in part because supply was surprisingly strong, thanks to surging production from the U.S. and an increase in production in Libya. At the same time, an economic slowdown in Europe and China has hurt demand, and a stronger dollar raised the price of gas outside the U.S. Oil closed today at 5 year lows.
  • October and November jobs reports further confirmed that the summer weakness was probably a blip. The Bureau of Labor reported last Friday that nonfarm payrolls rose by 321,000 and the unemployment rate was unchanged from October at 5.8%. A very low monthly increase in hourly earnings for production and nonsupervisory workers of 4 cents is an indication that unemployment may trend lower still before inflationary pressures set in.
  • Mutual-fund data shows that investors remain reluctant to commit money to stocks. Analysts think that actually could help extend the rally in the months ahead.
  • As the Fed ends monetary easing and is set to raise rates sometime in mid-2015, the European Central Bank (ECB) and the Bank of Japan (BOJ) are moving toward more easing. Short-term bonds should feel the impact of rate increases more than long-term bonds, as lower rates in Europe and Japan increase demand for long-term U.S. bonds with relatively more attractive yields. That, as well as several secular trends, will likely keep long-term U.S. bond yields low relative to history.
  • Analysts believe the U.S. economy will lead the pack and will show GDP growth in the area of 2.5% to 3% in 2015. While the U.S. economy is not without its challenges (labor participation is still low), it is in a better position than other developed markets. Perhaps the biggest challenge facing the U.S. economy is weaker growth overseas.
  • Analysts continue to prefer stocks over bonds and cash, even with volatility expected to rise.
  • Analysts like Technology, Industrials, and Energy
  • Over the past few months, energy stocks have sold off to a point that the sector as a group is currently relatively cheap compared with its history, which could make this a rewarding time to invest. Energy has rarely been this cheap relative to the S&P 500, and when the sector reached these relative valuations in the past, it has usually outperformed the market during the following 12 months analysts note.

The views presented are not intended to be relied on as a forecast, research or investment advice and are the opinions of the sources cited and are subject to change based on subsequent developments. They are not a recommendation, offer or solicitation to buy or sell any securities or to adopt any investment strategy.

Disclosures:
https://www.blackrock.com/investing/insights/investment-directions
https://www.fidelity.com/viewpoints/investing-ideas/oil-prices-fall
https://www.jpmorganfunds.com/cm/Satellite?pagename=jpmfVanityWrapper&UserFriendlyURL=contentdet_module&smID=1159383786125
https://www.lordabbett.com/en/perspectives/economicinsights/stocks-going-with-the-flows.html