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Stock Market Report For Week Ended December 19, 2014

Powerful midweek rally boosts stocks

After threatening to continue the sharp decline that they had begun the previous week, stocks rallied powerfully at midweek and ended with substantial gains. Following assurances on Wednesday from the Federal Reserve that it would be "patient" in raising interest rates, the Standard & Poor's 500 Index and the Dow Jones Industrial Average managed their largest two-day gain since late 2011. The large-cap benchmarks ended the week relatively unchanged for the month, while the smaller-cap indexes boasted modest gains.

Oil slide further disrupts market

The slide in oil prices continued to weigh on energy stocks early in the week, and it began to pose another challenge for the market. The drop in oil has hit the Russian economy particularly hard, as the country depends on oil for roughly half of its export income. The Russian ruble plunged on Monday and Tuesday due to fears that the Russian financial system would be unable to cope with the decline-and unable to stem it with foreign assistance due to sanctions over the conflict in Ukraine. This sparked fears of a broader emerging markets currency crisis like the one that occurred in 1998, and not only the ruble, but the Turkish lira, Brazilian real, Indonesian rupiah, and other currencies sank to multiyear or record lows against the U.S. dollar.

Replay of 1998 emerging markets crisis is unlikely

T. Rowe Price credit analysts and portfolio managers generally agree that a replay of the 1998 emerging markets crisis is unlikely. They note that the fundamental condition of most of the developing countries whose debt experienced the worst losses in 2013 steadily improved this year. While some individual countries still have significant current account deficits, emerging markets on average maintain a current account surplus. Most developing countries now have flexible exchange rates and monetary policies, ample foreign exchange reserves, and relatively low debt burdens, all of which should help prevent systemic contagion as seen in the late 1990s.

Fed patience turns sentiment

In any case, investors' attention turned back to the U.S. on Wednesday following renewed signals from the Federal Reserve that an increase in short-term rates is unlikely in the near future and that increases will be moderate once they begin. Wednesday also brought news that consumer prices declined 0.3% in November, due in large part to the drop in oil prices that has hampered markets in recent weeks. The falling inflation data indicated that the Fed has considerable leeway in timing its rate increases, and it may have also reminded investors of the upside to consumer spending from falling gas prices.

Ruble rebounds; Greek departure from euro seems less likely

The Fed-driven boost in sentiment seemed to carry over into the end of the week, and signs of stabilization overseas boosted markets as well. The ruble recovered somewhat in response to intervention by the Russian government. While a large hike in interest rates by the Russian central bank had failed to stem the selling at the start of the week, sales of foreign exchange reserves appeared to gain some traction for the currency. Investors were also encouraged by assurances that the Greek opposition party would not guide the country out of the euro if it wins upcoming elections.


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