- Commodity rout unnerves investors anticipating higher rates
- Looming Fed sparks high-yield debt selloff, contagion fears
U.S. stocks capped their worst week since the August selloff as optimism over the economy’s strength gave way to anxiety over the Federal Reserve just as commodities and credit markets flashed signs of danger.
The Standard & Poor’s 500 Index fell 3.8 percent in the five days to end at a two-month low. Energy shares plunged as the cheapest crude oil since 2009 rekindled anxiety over deflation before the Fed’s Dec. 16 policy decision. Financial shares, the ostensible beneficiaries of any rate hike, tumbled 5.4 percent, as asset managers were routed after a high-yield mutual fund suspended redemptions.
Optimism that the U.S. economy is strong enough to withstand higher rates transformed into anxiousness, as a commodity selloff clouded the prospects for a global recovery and rekindled deflation concerns. The benchmark U.S. equity gauge ended at its lowest level since October amid concern that a rout in high-yield credit markets will spread at the same time that money managers must cope with shifting monetary policy.
“We have the continued decline in oil prices related to excess supply, and there’s market anxiety relating to the commodity complex due to the ongoing China unknown,” said Alan Gayle, senior strategist for Atlanta-based Ridgeworth Investments, which has about $42.5 billion in assets. “These factors have more than offset the relative strength of November economic data.”
The S&P 500 slipped to 2,012.37 in the five days, erasing a gain for the year. The index saw its biggest loss since September on Friday, falling 1.9 percent and breaking below its 100-day moving average on a closing basis for the first time since Nov. 13.
The prior Friday saw equity investors in a far different mood. The S&P 500 surged 2.1 percent on Dec. 4 for its biggest gain in three months after a government jobs report emboldened speculation the economy is strong enough to withstand higher rates.
That optimism faded, with a measure of investor anxiety rising by the most since August. The Chicago Board Options Exchange Volatility Index surged 65 percent, including a 26 percent spike on the last session that pushed the gauge to its highest level since Sept. 30.
Volatility has returned to global financial markets just days before the Fed is anticipated to raise rates for the first time in more than a decade. With commodity prices at a 16-year low adding to concern that weakness in China’s economy will spread, investors are seeking havens. Adding to investor worry Friday was news that Third Avenue Management took the unusual step of freezing withdrawals from a credit mutual fund.
The August swoon in equities that sent the S&P 500 into its first correction in four years was partly credited with forcing the Fed to delay raising rates. While traders are still pricing in a 72 percent chance that the central bank will act next week, that’s down from 78 percent on Dec. 7. The S&P 500 has fallen 4.6 percent since Nov. 3, when it reached its highest level since July.
“We would need very severe market dislocations on the order of 8 to 10 percent, or something like that, to get the Fed to reconsider,” Julian Emanuel, executive director of U.S. equity and derivatives strategy at UBS Group AG in New York, said Friday on Bloomberg Television. “The other aspect of that is the messaging of not hiking could pressure the markets even further. There’s a lot more volatility and that’s something that investors need to be prepared for.”
All 10 main groups in the S&P 500 fell at least 1.8 percent, as energy shares were the biggest decliners with a 6.5 percent loss. West Texas Intermediate had its worst week in a year amid estimates that OPEC’s decision to scrap production limits will keep the market oversupplied.
Financial companies dropped the most since the period ending Aug. 21. Asset managers from T. Rowe Price Group Inc. to Legg Mason Inc. led losses, after Martin Whitman’s Third Avenue took the rare step of freezing withdrawals on Dec. 9.
Junk bonds are poised for their first annual loss since 2008. With the Fed expected to raise borrowing costs next week, raw material prices have slumped and defaults by the commodity industry are forecast to accelerate. BlackRock’s iShares iBoxx High Yield Corporate Bond ETF, the largest fund of its kind, fell to the lowest levels since 2009.
To David Herro of Harris Associates LP, the selling of interest rate-sensitive stocks such as utilities is an overreaction. U.S. companies are more insulated from rate risk than investors realize, and are actually undervalued in some cases, he said.
“It’s funny how so much red on the screen is due to fear of interest rates going up,” Herro, head of international stocks at Harris, said in an interview Friday with Bloomberg radio. “What’s going to happen? This has very little impact on how we value businesses. There’s a reason to be a little optimistic given prices and I don’t think value is collapsing. In fact, prices are deflated.”