The stock market is off to a very rocky start in 2015. Rising concerns that Greece might end up leaving the Eurozone and the terrorist attacks in Paris generated a lot of uneasiness. Crude oil's decline didn't help with oil down seven weeks in a row. The jobs report was good but analysts are concerned over wage growth. Stocks did get a boost from some dovish comments out of two Federal Reserve governors this past week.

Overall it was the worst start to the year since 2009. All of the major U.S. indices posted weekly losses. The Dow Industrials and the NASDAQ composite both lost about -0.5%. The S&P 500 fell -0.65%. The small cap Russell 2000 dropped -1.0%. Housing stocks and biotech stocks were two groups that posted gains. Yet transports and banking stocks really underperformed with big declines. Oil-related equities also dropped sharply. Crude oil tagged new five-year lows. Meanwhile gold and silver rebounded, likely on geopolitical fears.

Economic Data

There was a lot of economic data to digest. The FOMC minutes were a non event last week. However, Charles Evans is the Fed President of the Chicago Federal Reserve and he is a voting member of the FOMC this year. Evans gave the market a boost when he said raising rates too early would be a catastrophe. He suggested that the Fed should wait to raise rates until 2016. Meanwhile another Fed President, this time Atlanta's Dennis Lockhart, also offered dovish comments suggesting the Fed should be patient and not rush into raising rates too soon.

The latest vehicle sales numbers showed a healthy pace of 16.8 million automobiles a year. That's a little less than expected but still strong. The ISM services index dropped from 59.3 in November to 56.2 in December. This drop is noteworthy because it's the first time ever that all ten components of the ISM services index declined at the same time.

The latest reading on factory orders showed a drop of -0.7% in November. That was worse than the -0.5% expected and the fourth monthly decline in a row. Meanwhile wholesale inventories rose +0.8% in November following October's +0.6%, which was revised up from +0.4%.

The most recent reading on U.S. consumer confidence hit a seven-year high. That might be due to the improving labor market. The ADP National Employment Report said their November numbers were revised up from 208,000 to 227,000. December's number came in at +241K.

The nonfarm payroll (jobs) report on Friday morning also beat expectations with +252,000 new jobs in December. The jobs gain in December capped the best year for job growth in the U.S. since 1999 with 2.95 million jobs created. It's also the 58 month in a row of job gains, which is a record. Unfortunately most of those jobs have been part time as businesses hire more part time employees to keep their hours under 30 to avoid the expense of Obamacare.

November's jobs number was revised higher from 321,000 to 353,000. October was revised up from 243K to 261K. Altogether that puts the 2014 average job growth at +246,000 a month. Sadly there were some sore spots in the jobs data. Economists are concerned with the drop in average hourly wages, which declined -0.2% in December after a +0.2% gain in November. Falling wages is deflationary and a warning sign for the Fed. Plus the labor force participation rate plunged back to 62.7%, which is the lowest level since December 1977.

Analysts are starting to worry about the impact that the collapsing price of crude oil could have on employment inside the U.S. The Dallas Federal Reserve is estimating that 125,000 people will lose their jobs in the energy sector in the next six months. Ancillary jobs to the energy sector could see another 50,000 decline.

There was a lot of speculation, or possibly hope, that crude oil could be bottoming. The price of crude did decline last week but it spend most of the week churning sideways. Friday did see a dip to new multi-year lows. If you look closely oil still has a trend of lower highs. I've heard a lot of speculation that WTI crude oil prices are headed for $40.00 a barrel. Yet a Bank of America Merrill Lynch analyst is now forecasting a drop closer to $35 a barrel. There are option traders speculating on a drop below $30/bbl. (chart below is for the USO oil ETF, not WTI crude futures).

Chart of the USO oil ETF

AAA's Chart of gasoline prices

U.S. consumers are loving the low gas prices. On January 5th AAA reported that gas prices had fallen for 100 days in a row (a record). Today the national average is $2.13 a gallon. Several states have prices below $2. A barrel with a few approaching $1.50 a gallon. This is great news for consumers but it could be a powder keg for other parts of the world. Middle East oil producers could see increased turmoil. Russia is suffering from the big drop in oil as oil is a major export and the biggest influx of cash for the government's budget. Mexico is suffering. Just about every oil producer on the planet is getting hurt by oil's decline.

Overseas Economic Data

Economic data overseas was mostly negative. The only decent headline seemed to be Eurozone retail sales rising +0.6% last month, which was significantly better than the +0.2% estimated. Meanwhile Britain's industrial production dropped -0.1% for the month. France's fell -0.3%. Germany's dropped -0.1%. Germany also said their factory orders declined -2.4%. Retail sales in Germany rose +1.0%, which was better than expected but down from the prior month's +2% gain. German unemployment dropped to 6.5%, which is a level not seen in more than 20 years.

Last Tuesday the market's sell-off was fueled by growing worries that Greece is nearing an uncoordinated exit from the Eurozone. Researchers believe that the left-wing Syriza party in Greece is poised to have enough votes to win in that country's elections on January 25th. If they do win they could immediately vote to leave the Euro. According to an economic historian at the University of California at Berkeley, such an exit from the Eurozone would be like the Lehman Brother's financial disaster times two.

Another challenge is the European Central Bank's (ECB) next attempt at quantitative easing (QE). The ECB is said to be considering at 500 billion euro QE program to be announced at their next meeting on January 22nd. However, Bloomberg reported on Friday that the ECB still hasn't decided what format such a QE program would take, and this rattled the equity markets.

Significant economic data out of Asia was relatively quiet last week. China said their Producer Prices data for December plunged -3.3%. That's the biggest drop in more than two years and marks the 34th month in a row of negative PPI readings.

Major Indices:

The S&P 500 saw some pretty big swings with a drop from the prior Friday's close of 2,058 down to Tuesday's low of 1,992 (-66 points). By Friday morning the S&P 500 was back up to 2,064 (+72 points) but gains faded and the index ended the week with a loss. The Fed governor comments, the terrorist attack in Paris, the economist data, and Greece marching toward a euro exit all played a part in the volatility.

The index is kind of in no man's land at the moment. It might find support in the 1,990-2,000 zone on a decline. While the 2,065-2,095 area looks like overhead resistance. There is no trend on a short-term basis. Meanwhile the long-term trend is looking a little ragged.

Intraday chart of the S&P 500 index:

chart of the S&P 500 index:

Weekly chart of the S&P 500 index

The NASDAQ composite had an equally volatile week. The index closed right in the middle of its recent trading range. The 4,800 area is clearly overhead resistance while support appears to be in the 4,550 region. Where is goes next is anyone's guess.

chart of the NASDAQ Composite index:

Weekly Chart of the NASDAQ Composite index:

The small cap Russell 2000's performance last week doesn't provide a lot of clues either. The bounce from Tuesday's low does create a higher low. Unfortunately the reversal from its late December highs looks like a failed rally or bull trap breakout pattern.

chart of the Russell 2000 index

Economic Data & Event Calendar

This week we will get both the wholesale (PPI) and retail (CPI) data on inflation in the U.S. We'll also see two regional Fed surveys (New York and Philadelphia). The Philly Fed number might be a challenge. In November this was a shockingly higher 40.2. December's Philly Fed survey dropped to 24.3. Today analysts are expecting the survey to decline to 20.0 (numbers above zero suggest growth).

The biggest event for the week is probably the kick off for Q4 earnings season on Monday.

Economic and Event Calendar

- Monday, January 12 -
Q4 earnings season begins

- Tuesday, January 13 -
(nothing significant)

- Wednesday, January 14 -
U.S. Retail Sales
Business Inventory data
Federal Reserve's Beige Book
Japan's machine tool orders

- Thursday, January 15 -
Producer Price Index (PPI)
New York Empire State manufacturing survey
Philadelphia Fed survey

- Friday, January 16 -
Consumer Price Index (CPI)
U.S. Industrial Production
University of Michigan Consumer Sentiment

Additional Events to be aware of:

Jan. 22nd - ECB meeting
Jan. 25th - Greek Elections
Jan. 27-28th FOMC two-day meeting
Jan. 28th - FOMC policy update

Looking Ahead:

As we look ahead the market's focus should turn toward corporate earnings. The Q4 earnings season starts on Monday. Two months ago analysts were expecting the S&P 500 to earning between $130-138 in 2015. Today those estimates have been reduced to about $120. The super sharp rise in the U.S. dollar will hurt sales. About 50% of revenues from the S&P 500 companies does occur overseas and a high dollar makes them less competitive and more expensive. Another challenge is earnings from the energy sector. They are a significant portion of the U.S. economy. The crash in oil prices is estimated to produce a -23% drop in earnings for the industry. Of course earnings are in the rear window so Wall Street is always more sensitive to corporate guidance. Will American corporations issue bullish or bearish guidance as they look forward into 2015 and beyond?

On a short-term basis I am market neutral. I suspect the next couple of weeks might see more volatility. Earnings results will definitely flavor market direction. Yet investors, especially fund managers, might keep their eye on the ECB meeting scheduled for January 22nd and the Greek elections on January 25th. Therefore they might wait until after these two events before committing new capital to the market.

Bigger picture I'm still positive on the U.S. economy and stock market but that doesn't mean the market can't see a correction. The U.S. market has gone almost 1,200 days without a -10% correction. The closest we got was a -9.8% pullback on an intraday basis back in October 2014.

Meanwhile give your elected officials a call. The story this past week is that several Republicans and Democrats think it's a perfect time to raise the gas tax while prices are so low. I'm sure they'd like to hear your opinion on this issue.

~ James