Markets get back to business - and fast - in the new year.
There will be hangovers from the old year - like worries about oil prices, global growth and how frequently the Fed will raise rates. But there's also a flurry of Fed speakers and a very heavy calendar of important new data, including December jobs, that could shape trading in the early days of 2016.
But there's also another unexpected factor, new tensions in the Middle East with Saudi Arabia and Iran in a heightened state of agitation.
Oil was one of the biggest factors impeding stock market gains in 2015, leaving the S&P 500 flat and lower for the year. The outlook for oil has been for another move lower, due to global oversupply, but oil futures were rising at least temporarily Sunday night after Saudi Arabia's execution of a Shia cleric sparked outrage in Iran, where a mob burned and attacked Saudi Arabia's embassy.
Iranian Supreme Leader Ayatollah Ali Khamenei said the Saudi royal family would face divine vengeance, and Saudi Arabia broke diplomatic ties.
"All of this pits the Gulf region's largest producers against each other to the point of conflict," said John Kilduff of Again Capital. "The stakes are, obviously, tremendous. A quick climb down (in oil prices) looked likely until the Saudi move. This is potentially a very largere-inflation of oil's security price premium."
Stocks closed out a dramatic but ultimately, unsatisfying 2015, with the market selling off into the close on its final trading day, turning in a sluggish and mixed performance for the year.
The S&P 500 and Dow had their worst years since 2008. The S&P closed at 2,043, a decline of 0.7 per cent, a second negative year since 2008, following on the even slimmer 0.003 per cent decline of 2011. The Dow was down 2.2 per cent at 17,425, but the Nasdaq was a bright spot, closing up 5.7 per cent at 5007. A CNBC survey of 14 Wall Street strategists shows they expect relatively modest single-digit gains in 2016, with the S&P 500 expected to rise to an average 2,213.
The Treasury market, extremely quiet in the past week, could come to life in the coming week with new ISM manufacturing data Monday, Fed meeting minutes and trade data on Wednesday, and the December employment report Friday. There are also about a half-dozen Fed speeches, including Fed Vice Chair Stanley Fischer, who speaks at an economics conference over the weekend.
"It's the typical beginning of the month, reports coming in and people looking for a fresh start on a new year. January typically long term has been a relatively strong month, but in the more recent years, the returns haven't been that great," said Paul Hickey, co-founder of Bespoke. "Last year, we (stocks) were down 3 per cent, and the year before down 3.5 per cent, and 2013, up 5 per cent. The last two years have been really week so I don't think people are looking for too much."
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Economists expect to see 200,000 nonfarm payrolls Friday, just below the 211,000 jobs in November, and an unemployment rate unchanged at 5 per cent. Because of a weak comparison, economists expect that average hourly earnings could increase by as much 2.8 per cent year over year, higher than the recent trend.
"I think the theme we're going to see in the first half of the year is that the labour market is still doing reasonably well but other parts of the economy are more mixed. We should have good construction data, decent vehicle sales but you're going to have weakness in net exports and weakness in manufacturing," said Deutsche Bank chief US economist Joseph LaVorgna. "The question is how much of that spills into the nonmanufacturing sector."
LaVorgna expects growth to pick up to 2 per cent in 2016 after a weaker fourth-quarter pace, running at about 1.5 per cent.
The stock market's gains were repeatedly choked by oil's greater-than-expected decline in 2015. Oil's stronghold on other markets foiled the expectations of stock strategists that had forecast the S&P would rise to about 2,200 in 2015, according to an earlier CNBC strategist survey. The S&P 500 is now 4.3 per cent below its all-time high of 2,134 reached in May.
The dollar also was a culprit, biting into overseas profits of US multinationals and hurting commodities and emerging markets. The dollar index was up 9 per cent in 2015, but analysts expect the impact on corporate earnings to lessen in 2016.
"For next year our (S&P) target is 2,200 for year-end 2016. We're calling for modest gains," said Jill Carey Hall, equity strategist at Bank of America Merrill Lynch. "We're forecasting earnings growth of 5 per cent. That's a pickup from flattish earnings growth this year. … Earnings for the multinationals should see fewer headwinds."
Scott Wren, senior global equity strategist with Wells Fargo Investment Institute, said he expects the market to continue moving higher in 2016 even after a flat year. "Our analysis has shown that the market should finish higher. We wouldn't be surprised to see fairly quickly in the new year a new high in the S&P," he said. He sees the nearly 7-year-old bull market as being in the equivalent of a "seventh inning" of the nine, played in baseball.
"We're still leaning toward sectors that are more sensitive to the recovery here and aboard. Consumer discretionary, technology and we continue to like industrials. What we don't want clients doing is things like getting defensive in utilities and staples," said Wren. He expects the S&P to reach 2,280 at year-end 2016.
Traders have been watching the S&P into the year end, with an eye on 2011, the last flat year. "If the 2011 playbook is correct, we should have a strong first quarter. The market had a good move," said Scott Redler, partner with T3Live.com. The S&P was up 13 per cent in 2012.
Redler watches the market's short-term technicals and said 2015's volatile trading left the market feeling a lot more bearish then bullish.
"The question is whether the indices masked a lot of the weakness under the surface," he said.
If the S&P gets above 2,080, it would encourage buying, and a close above 2,103 would confirm upside bias, helping the market regain its highs, he said. But if the market moves lower, a close below 2,022 would be the first clue, and if it continued to sell off, the down move could take the S&P toward 1,950 or the 2015 lows of 1,840.
Apple is also a problem for bulls and it could keep pressure on tech, Redler said. Technically, the stock looks like it could weaken further. The one time darling was down 4.6 per cent for the year, its first negative year since 2008.
The selloff in commodities, particularly oil, was among the more dramatic market developments of 2015, with crude, gold, silver adding another year of steep losses, for the longest losing streak since 1998. West Texas Intermediate oil down 30 per cent for the year at $37.04.
Selling pressure is expected to remain, and traders are watching Wednesday's 10:30 a.m. ET government inventory report to see if oil supplies continue to build as they did in the past week.
Oil's decline was a big weight on stocks in the past year, knocking 60 per cent off energy profits and sending the S&P energy sector down 24 per cent for the year. It was the weakest sector followed by materials, which fell 10 per cent.
Crude's losses were the result of massive global oversupply but also the stronger dollar, which also wreaked havoc on emerging currencies. The dollar was up more than 20 per cent for the year against the Russian ruble, Brazilian real and Turkish lira, to name a few.
At the end of 2015, the 10-year was yielding 2.26 per cent, just slightly above the 2.17 per cent it was at a year ago.
In the two weeks since the Fed hiked rates, the 2-year yield has stretched up to as much as 1.10 per cent, a five year high. The curve has continued to flatten, as the longer duration securities like 10-year notes see yields rise at a slower pace than the Fed sensitive short end.
Trading should be much the same next year, according to Ian Lyngen, senior Treasury strategist at CRT Capital.
"Ironically we're not looking for anything more significant than we were looking for in 2015, namely a wide range, choppy price action, a fair amount of volatility, illiquid conditions exaggerating the volatility and a slow upward drift in the front end of the curve," said Lyngen. Lyngen said the coming week's data and Fed speakers are important, but the bond market will wait to see a few jobs reports before making bets on the next Fed rate hike.
The Fed has forecast four hikes for 2016, but the market expects about half that amount. "Cooler heads will prevail in the Treasury market after we get a couple of employment reports, and we're closer to pricing in the Fed's rate hikes," said Lyngen.