Dollars and Sense: Markets erupt over energy, earnings, and Europe

Volatility continues. Last week was wild on Wall Street, though the volatility was not completely unexpected. In the first three days of the year, beginning Jan. 2, the markets headed down. We had lots of reasons for the sell-off—sinking oil prices and political and economic troubles abroad. A lot of investors waited until after the first of the year to lock in their 2014 gains so they wouldn’t have to pay taxes on them until April 2016. So even though the markets dropped precipitously through Tuesday, we saw no panic, though it’s hard not to panic a bit when the Dow plunges more than 300 points in a single day.

Calmer waters ahead. Regular readers of this column will remember what I said here a couple of months ago: When the Dow is in the 17,000 to 18,000 range, we’ll see a lot more 100-, 200-, and sometimes even 300-point daily moves. And I would note that on Wednesday and Thursday, the Dow recovered all it had lost. By the end of the day Thursday, we were back where we started the year. Some analysts are calling it déjà vu all over again, noting the first quarter of 2014 was messy in the markets before the S&P 500 rebounded and ended up posting a double-digit gain for the third straight year. But last year we had different circumstances. The weather was terrible in the first quarter of 2014, and lots of the economic sluggishness then was weather-related. My only point here is that it’s risky to make decisions based on a single day’s or even a single week’s performance.

Interesting times. That said, we did get some interesting and at times troubling economic news from Europe this week. The euro is now worth just $1.19, its lowest value since December 2005. Europe has been stagnant generally for the past few years. Several years ago, Greek banks were failing and the country was on the verge of collapse. The rest of Europe did a controversial bailout of the Greek economy. Now the big fear in Europe is that Greece won’t meet its bailout obligations and will abandon the euro in the process. General elections scheduled for Jan. 25 have an anti-eurozone party polling at an unexpectedly strong third place in the run-up to the election. The leader of that party said last week he would not advocate for pulling Greece out of the eurozone but would renegotiate the terms of Greece’s bailout repayments. He also would eliminate some austerity measures and try to get the rest of the eurozone to write down or even eliminate some of the original debt. That position, as you can imagine, is not popular with Germany’s Angela Merkel and other European leaders, who put a lot of money on the line to save Greece.

Oil developments. We also saw a few new developments in the energy markets. As prices have dropped so dramatically, it has created some unintended consequences in the value chain. Russia has increased production in a desperate attempt to keep oil revenue flowing, despite the falling prices. Consumption has gone up as retail prices have dropped. Production of marginal or expensive wells has in some cases stopped altogether, as has construction of new wells. The bottom line on all these sometimes contradictory movements is that crude oil inventories have dipped, and the price seems to have stabilized, at least temporarily.

Jobs rebounding. We also got a new jobs report on Friday. The Bureau of Labor Statistics said the United States added 252,000 jobs in December, coming in better than a forecast increase of 240,000. This marks the 11th consecutive month of job gains above 200,000. The unemployment rate fell to 5.6 percent from 5.8 percent. The real news is that November’s jobs number, which was already strong, was upwardly revised to an even better 353,000. Bottom line: The economy added more than 3 million jobs last year. That’s a very strong year.

The week ahead. We will see a full calendar of economic reports, including retail sales, which comes out on Wednesday. Given the Christmas season gone by, that report will generate more interest than usual. But the big news for the next couple of week will be corporate earnings. The price-to-earnings ratio is a little high now, as we’ve mentioned in weeks past. Analysts are going to be looking for signs that earnings will support these high stock prices. If earnings are strong, we might see new record prices in the first quarter.