Market Perspective for November 28, 2014

This year, Black Friday may be best remembered for OPEC’s Thanksgiving Day sale on black gold, rather than holiday shopping. The oil cartel’s decision to keep oil production levels elevated sent prices tumbling on Thursday.

Heading into Thursday, most oil bears were expecting OPEC to make a token cut in production, but the decision to hold production levels shocked the market and sent West Texas Intermediate Crude below $70 a barrel. This move alone may cause a drop of approximately 15 cents at the gas pump over the coming weeks. Venezuela was desperate for production cuts because the socialist economy is on the verge of collapse as foreign reserves drain. The country recently received a $4 billion loan from China, but spent one-third of it in one week trying to defend the value of their currency. At the rate Venezuela is bleeding capital, its foreign currency reserves could be exhausted within three months.

Oil exporter Nigeria moved to devalue its currency earlier in the week. Norway and Canada saw their currencies weaken on Thursday, and Russia’s ruble again tumbled. The countries most at risk from the oil price decline are those with smaller and less developed economies where the energy sector dominates as a share of GDP. Venezuela faces an acute crisis because it has to repay U.S. dollar denominated bonds and it is fast running out of U.S. dollars. A default in Venezuela would affect global markets because the country makes up more than 5 percent of many emerging bond indexes.

This is all good news for the U.S. consumer a stronger U.S. dollar will push down the prices of other commodities along with the cost of imports. It will however, be problematic for the energy sector. Broad energy funds were down more than 6 percent in early trading on Friday. In contrast, transportation and retail sectors are set to benefit from falling energy prices amidst a growing economy. SPDR Retail (XRT) was up more than 1 percent in Friday trading, as was iShares Dow Jones U.S. Transportation (IYT).

This week the Bureau of Economic Analysis increased its estimate of third quarter GDP growth to 3.9 percent. The spike in growth was due to rising exports, lower imports and more fixed asset investment, even though the consumer has remained largely on the sidelines. The drop in oil prices could easily entice people to spend more during the holiday season and allow the economy to finally fire on all cylinders. A strong dollar, weak commodities and an improving U.S. economy were the conditions for the bull market rally in the late 1990s, which commenced after Republicans won control of Congress under a Democratic president. Similar factors are in place this year. That said, volatility is likely to return in 2015 as oil and commodity exporting countries run into trouble, but prospects look good for extended growth in the United States.

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