Stock Market Week Ahead: Oil's Pull, Interest Rate Sensitivity to Kick Off Year

Are you ready for a fresh round of market tests in the New Year? Actually, the late-2015 sputter leaves many on Wall Street wondering if a few unresolved market drivers won’t stick around in January and beyond.

Oil, for instance. If you ask the majority of oil industry analysts, culprits including heavy supplies that zapped some 30% from crude oil’s price in 2015 (and stained the stock market) could persist. As can be typical after a big move like crude’s, short-term volatility could emerge to deliver some pricing relief to futures contracts. But most industry analysts believe it will take time for energy supply and demand issues to sort out, considering little inclination from major players to yet change production.

Of course, a strong dollar relative to its global counterparts was a major story for all financial markets. A stronger dollar is a drag on commodity pricing, while holding potentially negative implications for U.S. exporters. For the full year, the ICE Dollar Index, a broad measure of the currency against major rivals, was up 8.8%. Asian stock markets largely closed out 2015 with losses, while Europe is eyeing its fourth straight year of gains.

And then there’s the pacing of Federal Reserve interest rate hikes. Friday’s looming December payrolls report could be the first economic clue of significance in 2016 (see next week’s full economic schedule below). Strength and variety in hiring, as well as potentially inflationary wage growth, have been important points of Fed discussion, members have said in various speeches. December’s hiring snapshot could set the tone for the formal Fed policy conversation that’s due to take place on January 27, and again in March. It’s that March meeting that short-term Fed funds traders give a 56% chance for producing a follow-up interest rate hike, according the CME Group FedWatch.

Glad That’s Over?
Beyond the economy, links between commodities to stocks is a constant reminder of the power of intermarket analysis. Oil’s implications for equity trading were pretty clear as the S&P 500 (SPX) ended the year on a negative tone. The S&P 500 energy sector index had shed over 20% for 2015 through Christmas. That finish left some on Wall Street grateful for a 2015 conclusion placing the broad-based index relatively close to where it started this volatile, commodities-stained trading year. At stake was a fourth straight year of gains for SPX —the longest since 2007, when the index closed the books on a five-year winning streak before the U.S. tipped into recession.

And on the upside?

The bulls did cheer the performance of the tech-studded NASDAQ Composite (COMP), an index of stocks largely immune from 2015’s energy-share crumble. COMP notched a fourth straight annual win, for its longest streak since 2007. There were also standout SPX sectors that could draw increased attention in 2016, especially if they help confirm the improving economy that most Wall Street economists are looking for. For instance, consumer discretionary stocks in the SPX logged a nearly 9% gain for the year, leading all SPX sectors.

Selective Shopping?
As stocks largely sputtered into the finish and the aging bull market (eyeing its seventh birthday in March 2016), it begs the question: Could 2016 be a year for stock pickers? A cloudy macroeconomic picture and the age of the stock market’s current run could push investors into a careful, sector-by-sector—even name-by-name—approach.

The overall economic environment remains generally positive, with moderate U.S. GDP growth and historically low levels of inflation. Still, some analysts warn that the aging bull could be showing some wear and tear. This will simply put more emphasis on due diligence and in separating micro factors from a macro picture that may look pretty familiar to late 2015.

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