Weekly Market Commentary November 26, 2018

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Global stocks continued to decline as economic weakness and the possibility of further rate increases by the Federal Reserve worried investors. After rallying in late October and early November, global stocks were trading near the levels reached during the October decline.

Last week, the S&P 500 dropped 3.8%. Global stock markets joined in the decline, sending the MSCI ACWI 2.7% lower. The Bloomberg BarCap Aggregate Bond Index was basically unchanged as gains from government-backed bonds were cancelled out by declines in corporate debt. Oil prices dropped sharply again as a host of negative news pressured prices lower.


Key Points for the Week

  • Stocks continued to decline on concerns over slowing growth.
  • Oil prices have fallen rapidly in the last month after increasing much of the year.
  • The European Union approved the negotiated Brexit agreement. The British Parliament is the agreement’s next stop.

Oil

WTI Crude

Oil has taken a massive hit since October with prices being slashed by a third. Last Friday, Oil took another hit with a 7.7% drop down to $50.42 a barrel, the lowest level in more than a year. Oil’s decline reflects some of the same factors affecting stocks as well as some factors to oil. Here is a summary of why oil has declined so rapidly:

Factors Affecting Oil and Stocks

Weakening Economic Growth — Oil demand is closely tied to global growth expectations, and these have dropped recently as key economic data has been weaker than expected. This has lowered expected demand for oil in the coming year and raised concerns about how quickly revenue and earnings will grow for the stock market.

Dollar Strength — Oil is priced in dollars. As the dollar has increased against foreign currencies, oil’s decline has appeared even larger. An increasing dollar also lowers the value of foreign earnings and puts pressure on some global markets with large dollar debts.

Factors Specific to Oil

Supply Increasing — U.S. oil output is growing so rapidly, it has become the world’s number one producer. Technological changes to the drilling process, such as fracking, have lowered the cost to drill and increased the speed at which new supply can be added or dropped. Oil inventories continue to rise, suggesting supply and demand are imbalanced.

Policy Issues — The Trump administration allowed major purchasers of Iranian oil additional time to wean themselves from their supplier. The waivers were larger and broader than expected and other producers had already ramped up production. The combination produced a short-term boost in supply.

Macro Trends — The inflow of new automobile users and higher demand from less-developed countries are being offset by greater energy efficiency and a move away from hydrocarbons in developed markets.


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