December 20, 2015
Weekly Market Outlook
By Keith Schneider
The US equity markets ended the week with losses after the Fed raised rates for the first time in almost 10 years. The initial reaction right after Yellen announced the Feds decision this Wednesday was a resounding approval, but by Fridays close things looked different and quite dicey.
The exception to the selloff is the very impressive Solar energy sector which divorced itself from the rout in oil and equities. Even more noteworthy is that the solar sector hit all-time highs on a relative basis when measured against fossil fuel. Considering pollution levels in China are so high that they are shutting down schools, it’s not surprising that solar sector is getting renewable focus.
Key US indexes are down around 4% this month, which seasonally is generally one of the strongest months, (first one to two weeks excluded) which leaves it just 7.5 days left to stay in alignment with historical patterns.
Also noteworthy is when the Fed initially raises rates it takes about 90 days for the markets to regurgitate the news by moving sideways to slightly down before getting on a bull run.
Bond yields usually rise in the months before the actual rate rise in anticipation of Fed action. However, this markets behavior is quite different as yields have actually dropped over the past six months.
Another anomaly is that commodity prices are usually already rising at this point of the liquidity cycle (initial fed tightening) but deflationary pressures have taken commodities down to levels back in 2009. Hardly an inflationary environment.
The expression “well it’s different this time” heard before the internet bubble popped) is often used as a reason not to be concerned about some sort of asset bubble and stay the course. Financial bubbles are really never different and burst because the excesses of human behavior haven’t changed and always run full circle.
Hence, it could be that now is time when precisely when one should be concerned given that we have never seen rates this low or at least looking back 5000 years. The monetary bubble might just have been popped and asset classes have not behaved as they have historically and a yellow flag.
Energy prices are still dropping and could stay that way especially if OPEC keeps pumping and renewable energy hits the global markets in force.
This week’s video we will focus on, gold, the Euro and solar energy.
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