With two weeks to go, it’s time to look back and reflect on what stories shaped the year. In chronological order, here are my “6 Biggest Money Stories of 2016”. 1. US Stock Market Correction: Investors were plunged into reality in February, as fears of a global growth slowdown pushed US stock indexes into a correction, which is defined as a more than 10 percent drop from the previous high mark. While stocks grabbed the headlines, it was the action in crude oil that freaked out insiders. On February 11th, US crude closed at $26.21 per barrel, the lowest point since 2003 and a 75 percent plunge from the June 2014 peak. The combination of weakening demand and fears of a global oil glut, prompted the International Energy Agency to say, "With the market already awash in oil, it is very hard to see how oil prices can rise significantly in the short term."
2. Fed Inaction/Action: A year ago, the Federal Reserve did something it had not done in nine years: it raised short-term interest rates by a quarter of a percentage point. The action ended a near seven-year period of zero interest rate policy or “ZIRP”. At that same December 2015 policy meeting, officials also released their “dot plot,” which is where each Fed meeting participant anonymously provides a prediction of where the fed funds rate should be at the end of the year for the next few years and in the longer run. The median forecast was for rates to rise by full percentage point in 2016, which we now know, was way off. Whether it was worries about slowing growth, the UK vote on whether or not to leave the European Union or the US Presidential election, it was the Fed’s inaction in 2016, which shaped most of the year. Now with the Fed’s one rate hike of 2016 behind us, the big question is whether the central bankers’ new dot plot, which anticipates a 0.75 percent in additional rate increases in 2017, comes to fruition or not.
3. Brexit: It may now seem quaint to remember what a big surprise it was that UK voters decided to leave the European Union on June 23rd. “Brexit” was a seismic and unexpected result, which caught global investors off guard. Markets tumbled in the days after the vote, but recovered fairly quickly. The vote forced Prime Minister David Cameron to step down and propelled Theresa May, who half-heartedly supported the Remain camp, to succeed him. May has vowed to begin the process of leaving the EU by the end of Q1 2017.
4. Wells Fargo Sales Debacle: When news emerged that Wells Fargo employees’ fraudulently opened as many as two million deposit and credit-card accounts without customers’ knowledge, in order to hit internal sales targets, it was a scandal that seemed impossibly old school. As Time’s Rana Foroohar noted, “the fraud in this case was just so easy for average people to understand.” What was harder to figure out was the bank’s response to the fraud. Instead of admitting that management had created a culture, which encouraged cross-selling at any cost, it cut 5,300 bad apples, paid a $185 million fine to regulators and hoped to sweep the whole issue under the rug.
Not so fast...the public outrage, combined with a Congressional hearing where Senator Elizabeth Warren took the unusual step of telling then-CEO John Stumpf to resign (“Have you fired any senior management, the people who actually oversaw this fraud... Your definition of accountability is to push this on your low-level employees. This is gutless leadership.”) Weeks later, Stumpf stepped down.
5. Wage Gains: If 2014 and 2015 were the strongest years of job gains of the recovery (+260K/mo and +221/mo, respectively), 2016 was the year when wages finally accelerated. Wage growth had remained stubbornly at 2 percent during the past few years, but in 2016, the improving economy and labor market helped wage growth start to outpace inflation. In November, wages were up 2.5 percent from a year ago. With the unemployment rate at nine-year lows, there is hope that the trend will continue -- and accelerate -- in 2017.
6. Post-Election Stock Rally/Bond Plunge: The much-feared market collapse that was associated with a Trump victory occurred…for about three hours on election night. But ever since president-elect Trump’s speech in the wee hours after the results were in, stock markets have gone parabolic on the upside. Worries about trade wars were replaced with delight over potential infrastructure spending, tax cuts and a reduction of regulations across a wide swath of industries.
While stocks were flying, bonds were plunging, as investors viewed those same policies as increasing growth rates and potentially spurring inflation. As a result, they believe the Fed will have to raise rates more quickly next year. Because higher interest rates erode the value of outstanding bonds, the price of 10-year treasuries have fallen and yields have jumped from a low of just under 1.4 percent during the summer to 2.6 percent, the highest level since September 2014.
- DJIA: 19,843, up 0.4% on week, up 13.9% YTD
- S&P 500: 2258, down 0.1% on week, up 10.5% YTD
- NASDAQ: 5437, down 0.1% on week, up 8.6% YTD
- Russell 2000: 1364, down 1.7% on week, up 20.1% YTD
- 10-Year Treasury yield: 2.59% (from 2.47% week ago)
- January Crude: $52.03, up 0.3% on week
- February Gold: $1,136.80, 6th straight weekly decline
- AAA Nat'l avg. for gallon of reg. gas: $2.23 (from $2.20 wk ago, $2.00 a year ago)
THE WEEK AHEAD:
Fed Chair Janet Yellen gives a speech on the state of the job market
10:00 Existing Home Sales
8:30 Durable Goods Orders
8:30 GDP (3rd estimate, previous=3.2%)
8:30 Chicago Fed Activity Index
8:30 Corporate Profits
9:00 FHFA House Price Index
10:00 Personal Income and Spending
10:00 New Home Sales
10:00 Consumer Sentiment
2:00 The U.S. bond market closes early ahead of Christmas