The beginning of the week appeared as though investors would get some much needed rest from the market turmoil. However, that wasn’t to be the case. All three major U.S. market indices entered corrections or 10 percent off their 52-week high. The Dow Jones Industrial Average briefly fell 500 points on Friday before closing down more than 3 percent last week. The NASDAQ Composite Index ended an eight-day losing streak on Tuesday only to slump with the broader market, ending down 4.3 percent, with the S&P 500 down 3.2 percent.
Despite the brief rally earlier in the week, markets turned sour across the world as investors continued to focus on oil and China. Both are in official bear-market territory, down 20 percent from their highs. Early Friday morning, China released disappointing news as their banks’ loan growth fell more than economists had predicted. Chinese banks have indicated lending conditions are getting riskier, causing many to wonder if this is the beginning of a credit cycle slowdown. Such a slowdown could have broad, global ramifications for investors and, with asset values inflated after years of stimulated Central Bank policies, it may mean even more volatility as we move further into 2016. Indeed, the CBOE Volatility Index, a measure of market volatility based on S&P 500 index option prices, is up over 8 percent last week. A higher measure in the CBOE Volatility Index indicates increased near-term volatility is expected by investors.
Another Week, Another Historic Low
Oil once again grabbed headlines as the usual suspects of oversupply and lack of demand pushed the commodity lower. Many analysts were hesitant to forecast oil at $20 a barrel, but it appears more are joining the chorus as it fell below $30 a barrel on Tuesday and Friday. These are prices not seen since 2003. Oil ended the week down more than 14 percent and off more than 20 percent since its 2016 high. While this bodes well for the consumer and what they pay for gas, there are more than 30 small oil companies that, altogether, owe more than $13 billion in debt and have already filed for bankruptcy during oil’s rout. Adding fuel to the fire, the U.S. shale drillers are proving to be more resilient than investors previously thought. Many of these producers borrowed heavily to participate in the once-thriving U.S. drilling expansion and are now forced to continue drilling at depressed prices in order to make their debt payments. This only serves to exacerbate the supply issue and a possible global slowdown triggered by China could mean depressed demand for the foreseeable future.
2015 was a banner year for car sales. A stronger U.S. economy last year, lower oil, and favorable financing terms helped push the measure beyond its previous peak 15 years ago. According to the report, Americans spent roughly $570 billion on new vehicles with auto makers selling 17.5 million cars and trucks. In fact, trucks and sport-utility vehicles accounted for more than 50 percent of auto sales last year as the price of gasoline hovers around $2 per gallon across the country. However, a confluence of events in 2016 seeks to cast a shadow on the industry. Higher interest rates may impact auto financing while the world’s largest car market, China, is showing signs of an economic slowdown. This led to declines in a number of large U.S. auto makers late last year and the early part of 2016.
Fun Story of the Week
There is a particular tree native to the Caribbean that has a rather nasty reputation. The manchineel tree, or as the Spanish call it, the “tree of death,” has rightly earned the Guinness World Record as the world’s most dangerous tree. The sap of the tree contains a number of compounds that can cause severe burning reactions to the skin, making it a precarious spot to hide during the rainstorms that frequent the Caribbean. While that may sound bad, it’s the fruit of the tree that can ultimately kill a full grown adult. The small, green fruit look a lot like apples and, according to those who have unwittingly tried them, taste slightly sweet. The trees are notoriously difficult to eradicate as chopping them down releases the sap and burning them spreads chemicals in the smoke that can temporarily blind a person and cause significant breathing problems. Given the lack of competition and its toxic nature, it’s no wonder it has retained the ominous moniker.