The financial markets seem bleak, but there's cause for hope

Wall Street closed down for a fifth session on Tuesday, with the S&P 500 suffering its longest losing streak, as small-cap and energy shares were hit hard after oil fell further below $50 a barrel. Key equity benchmark indices in the US have had their worst start to a year since the 2008 global financial crisis. The slide in crude-oil prices is the driving force behind lower stock prices as it has raised investor worries about global economic growth.

European stock markets extended losses Tuesday, as analysts seem worried about Greece’s political future ahead of a general election on Jan. 25.

Investors started the New Year on hopes for more gains in U.S. stocks. But instead, they have been taking a more defensive position, lifting prices of safe-haven investments like Treasury bonds. On Tuesday, that demand for safe investment sent the yield on the 10-year note briefly below 2%, ending the day at its lowest level since May 2013, and benefited shares of utilities and telecommunications companies.

“The bond market is showing growing doubt whether the U.S. has the ability to withstand the jolts from abroad,” said William O’Donnell, head of U.S. government-bond strategy at RBS Securities Inc. in Stamford, Conn. “The Fed may be forced to delay an interest rate increase this year if Europe is hit by a crisis.”

“[Investors] are rotating into more defensive sectors and…minimizing their bets” on riskier investments, said Darren Wolfberg, head of U.S. cash equity trading at BNP Paribas.

The S&P 500 (SPX) dropped 0.9 percent to settle at 2,002.61, extending four-day losing string. That marks the most consecutive losses since December 2013. The Russell 2000 Index was down 1.7 percent, after losing as much as 2.4 percent earlier. The Dow lost 130.01 points or 0.7 percent to arrive at 17,371.64, declining for its sixth straight day. The S&P 500 has retreated 4.2 percent for the past five trading sessions, with the Dow and S&P 500 suffering on Monday their steepest single-session drop since Oct. 9.

U.S. stocks showed high volatility as swung between gains and losses throughout the day, with the S&P 500 trimming an early rally to fall almost 1.4 percent. The gauge erased declines in late afternoon trading, before falling again in the final half hour.

“At this point it’s going to get hard to bottom out this market until you’ve bottomed oil,” Jim Paulsen, who helps oversee $345 billion as chief investment strategist at Wells Capital Management, said by phone. “It’s really got people spooked. I do think oil will bottom and the dollar will peak and it’ll get us away from this mini-panic.”

Oil prices sink further below the symbolic threshold of $50 a barrel, extending a three-day losing string, amid speculation that U.S. crude inventories will grow. The two oil benchmarks, Brent and West Texas Intermediate, have now lost more than half of their value as competing producers vow not to cut oil production, exacerbating a glut in global supplies.

Investors are looking at the oil-price drop as a sign of economic weakness in Europe and Asia, which could have a negative impact on U.S. growth. Solid growth expectations spurred investor confidence, which brought major U.S. stock indexes to record levels as recently as Dec. 29.

“What we’re really looking for is, does this filter through to the U.S. economy? Then, it’s a global problem,” said Bryan Novak, senior managing director with Astor Investment Management, which manages $1.1 billion. “We’re carefully watching to see if the trend [of growth] is changing.”

The energy sector of the S&P 500, which were down 10 percent last year, plunged 1.3 percent yesterday. Only two out of the 10 major industries managed gains, with energy shares leading the losses.

David Kostin, equity strategist with Goldman Sachs, thinks investors should be looking to buy energy shares.

“Within the market we’re looking for pockets of opportunity,” Kostin said in an interview on Bloomberg Television’s “Market Makers” with Erik Schatzker and Stephanie Ruhle. “Relative to historical metrics, it’s extremely attractive.”

The U.S. dollar avoided the headwinds caused by falling oil as the greenback marked its best level against the Norwegian krone since July 2002 as weakening oil prices are putting downward pressure on the world’s major oil-exporting nations. The buck was at its highest level since May 2009 versus the Canadian dollar. The Russian ruble has dropped to its worst level against the U.S. currency since Dec. 17. The euro marked fresh nine-year low versus dollar. However, the greenback suffered its weakest level against the Japanese currency since mid-December.

Gold futures, also seen as as an alternative investment, rose 1.3% to $1219.30 an ounce as tumbling global equities and concerns over Greece’s future in the euro zone increased demand for gold as in inflation hedge.

Still, many investors are optimistic that U.S. stocks will rise this year, fueled by an improving economy and increasing corporate profits. Wall Street analysts are expecting the companies to report 7.8% earnings growth in 2015, according to FactSet.

The 2014 Q4 earnings season is about to kick off on Jan. 12 with Alcoa’s release. Companies are likely to post 2.4% of earnings growth, according to FactSet, and 1.1% year-over-year sales growth.

Tuesday’s economic data send mixed signals on U.S. economy. Service-sector activity in December missed expectations and expanded at its slowest rate since February, according to the Institute for Supply Management. Its Non-Manufacturing Business Activity Index dropped to 56.2 from 59.3 in November, while economists were looking for a reading of 58.0.

New orders for U.S. factory goods saw seventh straight month of declines in November,, the Commerce Department reported, dropping 0.7% while a 0.8% fall was projected.

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