Daily Insight

U.S. stocks slid Friday, sending the broad market to a three-month low, and within 3% of the multi-year low hit on March 10, as higher oil prices heightened concern – again – that consumers will pull back on electronic and most other discretionary goods.

Consumer discretionary and information technology shares were the hardest hit, with financials not far behind. All ten major industry groups closed lower – no surprise there on a day when the major indices lost roughly 2%. Energy stocks, or the S&P 500 index that tracks these shares, was the only group that lost less than 1% as crude futures rose 2.04% on news that Israeli military exercises were meant to mimic an attack on Iran’s nuclear installations.

For the week, the Dow declined 3.78%; the S&P 500 was lower by 3.10% and the NASDAQ Composite dropped 1.97%.

Well, I guess the story that China’s fuel subsidy reduction – allowing the market price to float a bit more free – caused crude prices to fall lasted all of about 12 hours. That was the storyline on Thursday. The single-largest determinant of oil’s direction remains the dollar’s value and thus Fed policy. (Although, if a showdown between Israel and Iran materializes that will take over, but until then it is the Fed. A little tightening please; the longer they wait the more it shows the members of the FOMC fail to get it.

No doubt, allowing the price mechanism to work in places like China and India will cause demand to compress but to really break this trade – speculators’ bidding crude higher – it will take a fed funds boost. I don’t believe it will take much to do the trick, 3.00% by year end and the first 25 basis point hike will send a huge signal.

Crude futures are higher this morning and it’s telling considering the develops over the weekend. The Saudi’s reiterated that they’ll boost daily production by 200,000 barrels, which is on top of last month’s 300,000 barrel boost, bringing the daily boost to 550,000 in just a month’s time. In addition, they said daily production will move to 12.5 million barrels per day, from the current 9.5 million. That’s huge, and the fact that crude is trading higher this morning corroborates the trade is waiting for explicit Fed action before reversing, in my view.

The market really needs oil to come off, falling to $120-$125 per barrel will be a good start, before we gain some traction. We have several uncertainties to deal with, as we’ve spent much time focusing on, but with energy prices at these levels it adds just another obstacle for stocks to shake this range.

There are a number of positives that continue to receive little attention from the press – business sales remain upbeat, inventory levels are low, the labor market is holding up pretty well, income growth looks decent (although its impossible to keep up with oil’s rise), consumer spending has rebounded over the past two months and durable goods orders of late are showing business spending has some life. I feel the need to express these positives when talking about the uncertainties. Things are holding up much better than is being reported but when there are questions over tax and trade policy, the duration of the housing downturn and geopolitical events it is tough for stocks to break out. Then add in these energy costs.

More than 2 billion shares traded on the Big Board on Friday, the most since March 20, as the expiration of futures and options on indexes and individual stocks took place – known as quadruple witching. Quarterly re-structuring of the S&P 500 also boosted volume as the funds that mimic the index implemented the necessary trades to reflect these adjustments.

We’re without an economic release this morning, and will have to wait a couple of days for something meaningful. Starting Wednesday, we hit it hard as the Fed adjourns one of its two-day meetings. (The FOMC – the rate-setting committee – meets eight times a year, usually for one day. The meetings in January-February and June-July are two-day events.)

Unfortunately, they’ll leave rates unchanged, but will be forced to acknowledge their errors and will begin to gently raise rates by at the August 5 meeting – that’s my guess at least.

By the back-half of the week we’ll also get May durable goods orders, new home sales, the final revision to Q1 GDP, existing home sales and personal income and spending for May. So lots of good data and they’ll all be market movers.

Stock index futures have just reversed course; we were up nicely for most of the morning but have now gone negative as it’s being reported Goldman Sachs just downgraded the financial sector. These big brokerage calls kill me – it’s almost comical how they are so momentum based.

Have a great day!

Brent Vondera, Senior Analyst