Investor caution prevailed in the last full week leading up to the Federal Reserve meeting. The S&P 500 Index declined more than 3 percent on the week, revisiting negative territory for the year. Rate-hike speculations intensified volatility, extending even to sectors that are expected to benefit from higher interest rates, such as financials.
The market has faced turbulence marked by bursts of heavy selling in anticipation of rate changes since 2009 as various quantitative easing measures expired. Next week’s presumed increase will signify rate-normalization, in stark contrast to the six-year period of suppression, which should eventually improve the health of equities and the overall economy.
High yield bonds were also hit by selling as oil prices fell to $35 on Friday and is potentially poised to suffer its largest weekly loss in 2015. Bearish traders are targeting $30, but shale oil producers need new borrowing to repay maturing bonds. If the capital markets doubt their solvency, interest rates on junk bonds will rise and some firms will be pushed out of the market. Kinder Morgan (KMI) slashed its dividend by 75 percent in a bid to shore up its finances, which helped shares rally following the announcement.
November retail sales rose 0.2 percent, while ex-auto sales gained 0.4 percent, well above its 0.1 percent growth estimate. Business inventories were strong as well. Atlanta Federal Reserve’s fourth quarter GDP Now forecast to increase from 1.5 percent to 1.9 percent, supporting the likelihood of a rate increase at next week’s Federal Reserve meeting.
A significant merger between DuPont (DD) and Dow Chemical (DOW) may be in the works as the two firms plan to combine their businesses and create three new companies out of the combined divisions: agribusiness, materials and specialty products. The deal could be blocked by regulators, but since the firms are breaking apart, analysts think it stands a good chance of being approved. Since the firms are multinationals, they will require approval in more than just the United States.