It may not feel like it, but according to one widely used metric, stocks are actually more expensive than they've been since 2005.» Read More
Oil prices fell to a five-year low on Monday, after Morgan Stanley cut its 2015 forecast for Brent crude, citing oversupply.
The bank said Brent crude prices could average as little as $53 per barrel in 2015, although its base case scenario was for $70. This was down from an earlier estimate of $98.
"Without OPEC intervention, markets risk becoming unbalanced, with peak oversupply likely in the second quarter of 2015. Prices are set up to fall in the first half of 2015," said analysts Adam Longson and Elizabeth Volynsky in a report out late on Friday.
The price of oil has declined by around 40 percent since June, with Brent futures falling bellow $67 on Monday—their lowest level since October 2009.
The biggest trend of 2014 has been the incredible outperformance of the American economy when compared to the rest of the world. That divergence has reduced bond yields, sent the dollar surging, crushed commodities, and been a big tailwind for equities.
However, as stock prices have continued to surge, valuations have become more stretched and appear to have outpaced economic growth. That has left investors who watch traditional metrics unsure of how to invest in the year ahead.
"You can see the glass as half full or half empty," said Curtis Holden, senior investment officer with Houston-based Tanglewood Wealth Management. "It's half full because the U.S. right now looks pretty good as a place for investing verses the rest of the world. But it's half empty because this is a below-average recovery by our standards."
The latest piece of good news for America came on Friday, when the Bureau of Labor Statistics reported that 321,000 jobs were created in November, in a rock-solid report that also showed mild gains in income.
This is in line with a string of relatively strong U.S. numbers, in comparison to a global situation that remains rocky at best.
Japan and Europe are both battling off deflation and recession. Separately, oil-producing nations like Russia have been hammered by the plunge in oil price—which is itself partially due to slowing global growth and surging U.S. energy production.
These trends have strengthened the U.S. dollar, bettered the position of the U.S. consumer, and caused bond yields to drop dramatically around the world and in America. This all conspires to make U.S. stocks more attractive, both in relative economic terms, and because they seem poised to provide greater long-term returns than bonds.
However, rising valuations have caused pause for some value-obsessed investors. While off recent highs due to a strengthening earnings outlook, the S&P 500's price-to-earnings ratio has risen dramatically over the past few years.
Noting the current elevated level of valuations on CNBC's "Futures Now," Marc Chandler of Brown Brothers Harriman gave a succinct piece of advice for those buying stock now: "Pray."
"That's the problem with being a value investor—sometimes the market does not provide value investments," he continued.
"The discipline means you wait until you find value, and that's what the great investors of our generation do," Chandler said. "They say 'There's no opportunity now, so I'm going to have to stay in cash.'"
Of course, not everyone is able to do that do that. Convergex chief market strategist Nicholas Colas says that U.S. outperformance has laid bare a stark difference between two different sorts of investors.
"The way the average investor is different from institutional investors is that average investors have a choice — 'Do I want to be in the market a lot, a little, or not at all?'
Institutional investors won't sit out the market, "and thus have to shift assets based on where the best opportunities are. And the clear winner is the U.S.," he said. "But for a lot of people, there's a big disconnect, because there's not a lot of wage growth, there's not a lot of good news," Colas said.
Colas reports that one of the common questions he hears is "'Nick, things aren't good, so why is the market doing well?'"
"If you don't want to play, I totally understand," he said. "But at the end of the day, if you're saving over the medium to long term, you won't get much return in bonds. You can hold cash, but to do that you have to save money. So if you want to maintain your standard of living, then you're left with stocks."
The "Minsky moment" is back.
Six years ago, the theories of economist Hyman Minsky were used to make sense of the collapse in housing prices, and its attendant effects on the economy. Today, Marc Chandler says the energy sector has just suffered its own Minsky moment. And while he doesn't expect it to take down the stock market, the slide in oil could have a serious impact on the high-yield bond market.
Minsky moment is a term coined by Pimco economist Paul McCulley in 1998, and it refers to a point when a period of rapid growth and risk-taking leads to a sudden turn lower and a crisis. Chandler, global head of markets strategy at Brown Brothers Harriman, says that is precisely what is happening in crude oil.
"Many people a couple years ago, a year ago, were saying that oil prices could only go up—'we're in peak oil'—meaning that we're running out of the stuff. So a lot of things were leveraged based on oil prices that can only go up. Sort of like house prices—'they can only go up.' So what happened is, because people held this as a deep conviction, they leveraged up," Chandler said Thursday on CNBC's "Futures Now."
In fact, the energy sector has borrowed $90 billion in the high-yield market since 2008, Chandler said, making energy producers "a large component of the high-yield market itself."
The problem is that "a lot of the loans, like loans on houses, were made not so much on a person's ability to repay the loan as on the value of the house. Similarly, the banks and investors bought high-yield bonds or leveraged loans on the energy sector not on the basis of their ability to repay it, but on the value of the oil in the ground."
Even after plunging almost 40 percent in five months, WTI crude oil prices will continue to fall in coming weeks, according to Oppenheimer senior energy analyst Fadel Gheit.
"Most likely this is not a bottom. Most likely we'll see oil prices going lower," Gheit said Tuesday on CNBC's "Futures Now." "The same traders and speculators that took oil prices from $95 to $70 will also be able to take oil prices from $70 to $60, or even $55."
Gheit said it's difficult to put a number on the bottom, because "once you get to a certain level you are going to see a lot of speculation. Speculation usually overheats oil prices on the way up, and really brings them down hard on the way down."
If you believe the so-called Doctor Copper theory, the diagnosis for stocks is not good.
Copper futures plunged to a 4½-year low Sunday evening, before staging a bit of a resurgence Monday. But with the industrial metal down 9 percent in the past three months, the "Doctor Copper" theory has become a warning, for some, about where stocks are going.
A time-honored concept in markets, the theory holds that copper is able to sense economic turning points early, and thus measure the health of a stock market rally. This is because copper is a near-omnipresent metal used in homes, in electronics and for many industrial purposes. The idea, then, is that if copper prices are falling, economic activity is slowing down, which is bad news for other financial assets.
"Because copper has so many industrial uses, it's probably a great indicator," said metals guru George Gero of RBC Capital Markets, so falling copper prices should indeed cause concern.
Still, Chris Kimble of Kimble Charting Solutions notes that copper has been falling for years, even as equities have skyrocketed.
"Over the past two or three years, if you followed copper, you would have missed the S&P rally," Kimble pointed out.
Kimble said that copper has thus far managed to hold an important support line that it tested in 2002 and 2009. If it breaks below monthly support, which currently lies at $2.75 per pound, he would become concerned about equities. By early afternoon Monday, March copper futures up 1.8 percent to $2.90.
Bond buyers are getting a lot less money for their time. The question now is whether that trend will continue in 2015—and what it will ultimately mean for investors.
Over the course of 2014, the spread between longer-term Treasury yields and shorter-term yields has gotten smooshed. The widely watched 10-year/two-year spread has plunged from 2.7 percent to nearly 1.7 percent, as long-term yields have fallen and short-term yields have risen.
This phenomenon, known as yield curve flattening (because the chart showing the comparison between maturities and yields usually shows a curve with the longer-term bond yielding more, but that curve flattens when the spread diminishes) is common during Fed rate hikes, but is traditionally taken as a signal of coming recession.
That's because if investors are not demanding a higher return for longer-term bonds, it shows that they don't think inflation or growth are set to pick up dramatically.
For Peter Boockvar, chief market analyst at The Lindsey Group, the flattening of the yield curve is problematic indeed.
"There's continued divergence between the optimism of the stock market, and what the yield curve is telling you about a continued slowing in the global economy, which is a threat to corporate profits," Boockvar said. "U.S. equity guys are much more bullish on U.S. growth and think we're decoupling; the bond market is not as optimistic."
Still, more benign explanations also suggest themselves.
The Federal Reserve has said it's looking to raise its federal funds rate target, with many expecting the first hike to come in June 2015. Since short-term yields tend to follow the lead of the benchmark fed funds rate, that should raise short-term Treasury rates.
Meanwhile, inflation readings have been benign, with the consumer price index showing inflation of 1.7 percent over the past year, which is below the Fed's stated 2 percent target. Inflation expectations are critical to longer-term yields, since investors need to be adequately compensated for the risk that the value of money will drop over the decades that they hold those bonds.
The man some regard as the new bond king believes that the flattening will accelerate on the back of a coming rate hike. In a recent interview aired on CNBC, Jeff Gundlach of DoubleLine Capital predicted that the big surprise of 2015 will be just how much the yield curve flattens out.
"I think the Fed's going to raise rates. The message of 2014 has been, as the potential for Fed rate hikes has increased, the long end has done nothing but rally. I think the yield curve is going to flatten at a level previously thought unthinkable," Gundlach said.
It hasn't been a great couple of years to be a gold bug. Since peaking at $1,923.70 per troy ounce in September 2011, gold has lost nearly 40 percent of its value. And while gold hasn't dropped dramatically this year, it has failed to gain back.
But according to George Gero of RBC Capital Markets, the bullion trade is set to turn around in 2015.
"The decline from the $1,900s down to the $1,150s is a major decline, and it was reflected by all the funds fleeing gold and running into better-performing assets, whether it's equities or debt, and that's been continuing," Gero said Tuesday on CNBC's "Futures Now."
In 2014, gold hasn't been helped by the dollar's rally. The greenback has shown serious strength against other currencies, which has reduced gold's attractiveness. After all, since gold is priced in dollars, an increase in the value of a dollar means a decrease in the value of an ounce of gold. Additionally, since people buy gold to hedge against potential inflation, ebbing inflation fears dull gold's appeal.
Gero acknowledges that "crude selling off, and OPEC possibly doing nothing about it, helping crude stay weak, is anti-inflationary—so the people that have been looking for inflation haven't really found it."
But he adds that "now you're going to see some changes based on all the stimulus in Europe, in China and in Japan."
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Thursday's OPEC meeting is expected to have a profound effect on sliding oil prices. But according to one oil trader, it is not likely to be the effect that bulls are looking for.
OPEC nations "would certainly like [the oil price] to be higher, but in the short-term, I haven't heard anything that's going to cause it to go higher," Ray Carbone of Paramount Options said Tuesday on CNBC's "Futures Now."
Initial news out of Vienna, where the meeting is to be held, has not been encouraging. An early meeting between Saudi Arabia, Venezuela, Russia and Mexico yielded no results. In fact, Igor Sechin of Russia's Rosneft said on Tuesday that due to operational reasons, Russia is unable to cut oil output in the near-term.
This news led to skepticism that OPEC would be able to agree to cut production substantially—and oil prices got punished intraday as a result. In fact, WTI crude oil closed Tuesday at the lowest level since September 2010.
"The one that matters the most is the Saudis, and is it in their interest to come in there with an almost unilateral big cut to surprise the market? I'm not sure it is at the moment," Carbone said.
Meanwhile, a smaller cut "could almost be worse than nothing. It would be viewed as a token cut which means they've used some bullets already."
The stock market has heated up mightily after a swift October rout, with the S&P 500 6 percent higher in a month. And history suggests that it could soon get even better for the bulls.
In the 20 times when the S&P 500 has enjoyed moderate gains (between 0 and 15 percent) in the year to Thanksgiving, the S&P has added to those gains 18 of 20 times, according to Jason Goepfert of SentimenTrader. He also notes that "when it does decline, typically it's very, very small, so when you look at risk-reward just based on the time of the year, it's very, very positive."
Interestingly, if we alternately look at years in which the S&P is up 10 percent or more, the results are somewhat more mixed. When Goepfert, going back to 1950, looks solely at the 28 years in which the S&P was up 10 percent or more at Thanksgiving, 68 percent of the years were positive, with those 28 years averaging a healthy return of 2.4 percent between Thanksgiving and New Year's.
"There was actually a negative correlation between the pre-holiday and the post-holiday returns, suggesting that buying pressure earlier in the year exhausted some of the post-holiday enthusiasm," he wrote to CNBC.
What makes this a bit confusing is that performance-chasing is often credited for the year-end rally. In other words, underperforming managers are thought to take heavily bullish positions toward the end of the year in an attempt to make up for lagging the market during most of the year.
However, that would seem to be an argument for proportional gains pre- and post-Thanksgiving; the fact that more enthusiastic action ahead of the turkey carving seems to presage more muted action into New Year's seems to suggest that something else is going on here.
One explanation is that when stocks are up significantly, beating a benchmark like the S&P becomes a bit less important. Since few clients will kvetch about 15 percent gains in any market environment, hanging on to existing profits becomes more important than chasing fresh ones.
It's one of the biggest issues clouding the outlook for stocks in 2015: The Federal Reserve's coming move to increase the federal funds rate. But according to Joseph LaVorgna, chief U.S. economist at Deutsche Bank, investors really shouldn't sweat the coming move.
Ever since December 2008, the Fed's target on its key federal funds rate has been zero to 0.25 percent. This key interest rate (which is the risk-free rate at which institutions lend to each other) has a powerful impact on the inflation outlook and the overall economy, and the central bank's targeting of it has been seen as very useful in the aftermath of the financial crisis. However, the Fed is preparing to finally lift its target on the rate, with many market participants expecting that such a move will come in June 2015.
LaVorgna is in that camp, but he isn't with the market participants who call that a cause for concern.
"A lot of rate hikes will be an issue—but a few, not at all," LaVorgna said Thursday in a phone interview. "It will emphasize that things are actually better. If the economy doesn't weaken, it will be a real sign of confidence that the economy can stand on its own two feet."
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