The past week saw surprisingly low volatility considering the moves in the oil markets. Energy shares experienced some volatility on Monday, but along with oil prices bounced back over the week, before ending flat. This is starting to look like a bottom, but we’ll have to see how oil behaves over the coming days. The Saudis said they see oil bottoming around $60, which still leaves room for about an 8 percent decline in prices.
The major indexes maintained their upward trajectory. The S&P 500, Nasdaq and Dow Jones Industrial Average pushed on to new highs as large caps continue to be favored by investors. The Russell 2000 Index maintained its sideways movement, still stuck in a consolidation phase. It’s only a few small percentage points away from its all-time high and remains an attractive value proposition compared to the other indexes.
The Purchasing Managers’ Indexes out this week showed the U.S. manufacturing sector is still experiencing a robust expansion. This leading sector of the economy points to strong growth in fourth quarter of this year and into the first part of 2015. The ISM Services Index also pointed to a very robust expansion as the number came in at 59.3, much higher than expectations of 57.7, and up from October’s 57.1 reading. Anything above 50 signals expansion.
The consumer sector hit a bump with weaker than expected Black Friday sales, and that weighed on retail stocks. There are some compelling reasons for those sales to be off due to changing consumer spending patterns, such as more online shopping. Recent reports show online sales up strongly over 2013. The recent drop in oil prices should help boost retail sales, but prices at the pump are moving more slowly, down less than 4 percent over the past week even though oil is down over 10 percent.
Consumer data may improve markedly for more fundamental reasons in 2015 thanks to the stronger economy. Wage growth was 0.4 percent in November, one of the strongest months in years and more importantly, adds to prior wage gains earlier in 2014. Wage spikes in prior years were isolated and quickly faded, but this time it looks like a trend. Hiring was also strong in November, with 321,000 new jobs created. That number was above estimates and the most since January 2012.
We again saw volatility in the currency markets. The U.S. dollar rallied strongly against yen. It also finished higher against the euro, even though the euro rebounded on Thursday after European Central Bank President Mario Draghi was thwarted in his push for greater policy intervention. Draghi would like to see the ECB pursue a more aggressive policy, similar to the Fed’s quantitative easing strategy. His public comments had weakened the euro, but this week’s meeting showed he doesn’t yet have the support of the other top officials. The fact that the euro went lower on Friday signals investors expect Draghi will get his way in 2015.
Since the end of the year is approaching, funds are gearing up for capital gains distributions. Investors considering buying in a taxable account would be wise to avoid buying funds slated to pay large capital gains until after the record date, whereby avoiding a hefty tax bill. Most fund companies list their projected or planned capital gains distributions online. Here are the links for Fidelity, Vanguard, American, Third Avenue and Oakmark with their estimated distributions.
https://www.fidelity.com/taxes/fidelity-mutual-fund-tax-information/year-end
https://personal.vanguard.com/us/insights/article/update-prelimcapgains-112014
http://www.thirdave.com/top-news/2014-estimated-distributions/
https://www.americanfunds.com/advisor/tax/2014-year-end-distributions.html
http://www.oakmark.com/News/News-and-Insights-Placeholder/2014-Fund-Distribution-Estimates.htm