Stock Market Looks Past the Holidays Towards 2016
The end of the year brings an increased investor fear as the Dow and S&P drop.
December 2015
Aaron Gersh '16
As everyone plans for their wonderful holiday break, the stock market and its investors are living a nightmare before Christmas. By the end of the week on December 11th, the Dow had dropped by over 300 points and the S&P dropped around 2%; this was the S&P’s worst week since mid-August. The CBOE Volatility Index, an index of fear within the market, rose 60% through the duration of the week. The decreasing stock market and increasing investor fear have been caused partially by rumors of a Federal Reserve interest rate increase, but mostly because of low oil prices.
Firstly, while there has been speculation for a while that the Fed may increase interest rates, a decent job report that was recently released pretty much sealed the deal for a December interest rate hike. The United States Federal Reserve typically raises interest rates when they feel that the economy is growing to fast. This “over-expansion” may cause inflation that could stifle the country’s economic condition in the long run. Many economists, however, have bashed the idea saying it could hurt the country’s recovery process from the 2006 housing disaster.
The bigger and more evident cause of this turmoil comes from the falling gas prices that have hit stocks in the energy sector hard. Price per gallon of oil fell under $36 dollars in mid-December as the International Energy Agency reported that oil demand will slow by around 50% in this upcoming year. That, along with the increased production of OPEC oil and the introduction of Iranian oil have contributed to the price slump.
These factors however seem short term. Many economist believe that within five years, interest rates will be back at around where they are now. Additionally Barron’s recently published 2016 Outlook had not a single testimony that stocks would fall in 2016. So though investors may be seeing coal in their stockings for now, it’s hard not to look positively at the new year.