Markets Drop as Oil Prices Continue to Fall – 12/12/4

Summary:

  • S&P 500 declines 3.52% this week
  • Oil continues its downward spiral
  • Consumer Sentiment reaches strongest level since 2007
  • Black Friday Sales Decline, Cyber Monday Sales Increase
  • Qualified Plan Deferral Limits Change for 2015

 

Market Snapshot

 

    Price Returns
  Level 1 Week YTD
Dow Jones 17,280.83 -3.78% 4.25%
S&P 500 2,002.33 -3.52% 8.33%
NASDAQ 4,653.59 -2.66% 11.42%
WTI Oil 57.74 -12.37% -41.18%
MSCI EAFE 1,767.09 -3.55% -7.75%
MSCI EM 946.04 -4.02% -5.65%

 

Oil Prices Fall to 5-Year Low

Oil prices extended losses today, as WTI Oil fell below $60 a barrel for this first time since 2009.  Oil prices are down about 10% this week alone.  The International Energy Agency (IEA) once again cut its 2015 demand forecast, marking the fourth time they have done so in the last five months.  At its 2014 peak, oil prices were $107.26 back on June 20th.  The IEA does not expect the lower prices of oil to dent global supply or even impact demand in the short term.  Treasury Secretary Jack Lew commented that lower oil prices are an unquestioned positive for the U.S. economy. He noted the plunge in energy costs, which has pushed gas prices below $3 a gallon across most of the country, has helped boost a U.S. economy that is doing well otherwise. He said the decline is “like a tax cut to the economy” and praised U.S. oil production as a “great success story.”

These lower oil prices are also a good thing for countries that large are net importers of oil, like China, India, and Turkey, to name a few.  Bank of America Merrill Lynch recently came out with an estimate stating that, for every 10% drop in the price of oil, China’s GDP would increase 0.15%.  It seems like a strong estimate, but it certainly makes sense given the fact that China is the largest net oil importer in the world.  The news is not rosy for all countries, however.  As you will see in the chart below, lower oil prices may create budget issues in several oil-dependent nations.  This chart was released last week when oil was at $69.  Even still, it is easy to see the relationship between falling oil prices and the vulnerability of these nations.

Source: JP Morgan Asset Management

Consumer Sentiment at Strongest Level Since 2007 

Consumer Sentiment surged this month to a level of 93.8, much stronger than the 89.5 level that economists anticipated.  This reading represents the strongest level since January of 2007.  A big reason for this increase was due to falling gas prices, as consumers have more disposable income.  Falling gas prices also translate to consumer anticipation of lower inflation, another factor that drives consumer sentiment.  This comes at a good time for retailers with the holidays fast approaching, as stronger consumer sentiment generally leads to increased spending.

Black Friday Weekend Sales down, Cyber Monday Sales Up

Black Friday weekend sales declined this year as consumers opted to shop earlier in the month, as retailers began offering holiday deals as early as the first week in November.  Data shows that 133.7 million Americans hit the stores on Black Friday weekend and spent an estimated $50.9 Billion.  This represents an 11.3% decline from last year’s estimated $57.4 Billion, according to the National Retail Federation.  However, Cyber Monday sales rose 8.5% in 2014 as consumers turned more towards online shopping over the traditional brick and mortar stores.  The data shows that mobile sales are becoming increasingly important as mobile sales on Cyber Monday increased 27.6% this year.  However, the most interesting data to come out of mobile suggests that smartphones are still used primarily for browsing, not buying.  28.5% of online traffic came from smartphones, but they only contributed to 9.1% of actual sales.

These numbers are beginning to paint a picture that consumers will “spread out” their shopping as retailers offer deals throughout the month instead of focusing on just one or two days.  It also confirms that consumers are leaning more towards online shopping, a trend that has been increasing for years.  As a result, retailers are targeting more and more online and mobile customers, a trend we also expect to continue.

Overall, we still anticipate strong sales from retailers (both online and in store) for the remainder of the year as consumer sentiment, lower unemployment, and lower gas prices will drive a boost in spending for the remainder of the year.

Qualified Plan Contribution Limits Increased for 2015

The maximum elective deferral limits for Qualified Plans (i.e. 401(k), 403(b), etc) have been increased for 2015.  For those under the age of 50, the maximum contribution is $18,000 per year (up from $17,500).  For those over the age of 50, the limit is $24,000 (up from $23,000).  IRA contribution limits will remain the same at $5,500 per year ($6,500 for those over the age of 50).  Below is a summary chart that compares 2015 to 2014 on several key IRS limits:

 

  2015 2014
IRAs
IRA Contribution Limit $5,500 $5,500
IRA Catch-Up Contributions 1,000 1,000
IRA AGI Deduction Phase-out Starting at
Joint Return 98,000 96,000
Single or Head of Household 61,000 60,000
SEP
SEP Minimum Compensation 600 550
SEP Maximum Contribution 53,000 52,000
SEP Maximum Compensation 265,000 260,000
SIMPLE Plans
SIMPLE Maximum Contributions 12,500 12,000
Catch-up Contributions 3,000 2,500
401(k), 403(b), Profit-Sharing Plans, etc.
Annual Compensation 265,000 260,000
Elective Deferrals 18,000 17,500
Catch-up Contributions 6,000 5,500
Defined Contribution Limits 53,000 52,000

Source: IRS website