Monday’s pullback appears on track to continue into today’s session as well, with overnight weakness in Asia carrying into Europe and weighing on U.S. sentiment. Chinese stocks pulled back sharply in response to new restrictive measures by that country’s regulators to rein in rampant speculation in stocks. The oil price slide and fresh Fed worries appear to be at play a well.
Falling oil prices are a boon for the U.S., with low gasoline prices and an improving labor market helping the buying power of consumers, partly reversing the restraining effect of stagnant wages. On the flip side, the oil price development will have some negative effect on investments in the energy space that could have a bearing on players in other industries and regions as well.
Depending on the duration of low oil prices, the regional oil-centric economies of Texas and North Dakota could be at risk, as recent news-flow about oil exposed regional banks like Cullen/Frost (CFR), Texas Capital Bancshares (TCBI) and others shows. The net effect, however, is positive for the U.S. economy, with low energy costs freeing up consumers to spend the savings elsewhere in the economy.
[Listen to: Matthew Kerkhoff: Why QE Can’t Lead to Hyperinflation (Part 1)]
The improving economic backdrop is the primary reason why the Fed ended its QE program and is getting ready to start raising rates in the not-too-distant future. Press reports and commentary from Fed officials indicate that the FOMC is getting ready to change its post-meeting statement in a big way as they meet next week. The expectation is that they will drop the ‘considerable time’ phrase in the statement that the FOMC has been using to describe its commitment to keep rates lower.
Markets have largely taken the policy change at the Fed without losing a beat, but it is reasonable to expect at least some turbulence as rates start rising. The policy change at the Fed will be in contrast to what central banks in Europe, Japan and China are expected to do going forward. It is this policy divergence that has been pushing the exchange value of the U.S. dollar in recent days.
Given the market’s unbroken positive run from the early-October lows, we should probably not read too much into this slide. After all, stocks don’t move in only direction even though that seems to have been the pattern with us the last few years.
