Equities remained volatile last week as the S&P 500 Index gained 1.4% following two weeks of sharp declines. The rebound didn’t appear to be driven by any fundamental shifts, although rising oil prices and expectations of additional policy support from the European Central Bank and Bank of Japan helped. In some ways, last week’s bounce may have been due to a reaction from oversold conditions, and we are not seeing technical signs that would suggest these gains will have sustained traction. Investors remain skeptical and seem to be looking for the next crisis.
Fundamentals Remain Stronger Than Sentiment Suggests
The S&P 500 began the week at 1,880, dropped all of the way to 1,812 on midday Wednesday, and subsequently surged 5% to 1,906 by market close on Friday. As dramatic as those moves were, oil saw even bigger swings as prices plummeted early in the week before staging a comeback. Pessimism about the economy and risk assets has spread rapidly this year, with every downtick in oil prices triggering selling pressure, and (as we saw last week) the reverse has been happening as well.
We believe these wild gyrations are not in keeping with economic fundamentals. The weakening Chinese economy, falling oil prices and a slowdown in global manufacturing are dominating investor attention and are causing some to forecast a U.S. recession. We doubt that will occur. Consumer spending should continue to improve as a result of higher wages and lower oil prices. Government spending is also rising and should contribute to growth in 2016. The fourth quarter earnings season is still young, and while results are far from perfect, the numbers and forward guidance point to a decent economic outlook.