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The Markets This Week

December 3, 2014 | Weekly Commentary

The stock market edged up last week, with the Dow Jones Industrial Average eking out a record high. Thanks to the continuing plunge in crude oil prices, which intensified Friday, shares of groups aided by declining fuel costs—airlines, hotels, and retail, among others — soared in a light-trading, holiday-shortened week.

On Friday alone, consumer discretionary stocks rose 1.2% while the energy index sank 6%, reflecting a wholesale exit from the sector. That weakness worsened late Friday and prevented the broad market from closing the week at an all-time high.

The outsize moves came in the aftermath of OPEC’s decision not to cut oil output, on Thursday when financial markets were closed in the U.S. for Thanksgiving Day. That sent West Texas Intermediate crude to $66.15 per barrel, down 13.5% on the week and the lowest in over five years.

Last week, the Dow Jones Industrial Average added 18 points, or 0.1%, to 17,828.24, a record close. The Standard & Poor’s 500 index rose 4 to 2067.56, off slightly from the high set Wednesday. The Nasdaq Composite index rose 79, or 1.7%, to 4791.63.

Friday’s low trading activity could have accentuated market moves and might not be a good lens on the coming week. As Paul Nolte, a money manager at Kingsview Asset Management, notes, “There were all of six people trading Friday after the holiday.”

The oil price slide is a net positive for the consumer and U.S. stocks, but it will probably weigh on S&P 500 index fourth-quarter earnings reports through weakness in energy company profits, notes Michael Mullaney, chief investment officer at Fiduciary Trust in Boston. Overseas economies, particularly emerging markets that export oil, might get hurt, too, he adds.

Emerging market stocks plunged 2% Friday, a signal of investor worry about global growth. Jack Ablin, CIO of BMO Private Bank, observes that slowing demand is “a growing part of the reason” for the oil price drop, in addition to the world’s oversupply of black gold.

The U.S. economic news last week was generally mixed but didn’t dent the idea that the U.S. economy is improving. Third-quarter U.S. gross domestic product was revised to 3.9% at an annual rate from 3.5%, well above the 3.3% consensus.

Energy prices will probably be weak at least into the first half of 2015, and the big drop so far is probably curtailing the U.S. shale revolution already. U.S. oil-field production was down 500,000 barrels per day to 9.4 million from Sept. 12 to Nov. 14, according to Yardeni Research.

The S&P 500 index, up 12% this year, has not yet recorded a drop of four consecutive days, according to Bespoke Investment Group, the longest such streak in any calendar year. The previous longest was in 1997, when trading went until Aug. 26 before hitting a string of four down days.

(Source: Barrons Online)

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