Lump of Coal: Stocks Droop After Fed-Induced Rally Fades

Wall Street closed out a volatile week on a somber note Friday after a much-anticipated rate hike decision made by the FOMC failed to keep momentum positive.

The major averages ended the five-day period to the downside as the Dow saw its fourth-worst day of the year on both a point and percentage basis, with materials and utilities dropping about 3% for the week.

Here are the biggest headlines out of Wall Street you might have missed this week.

Rate Hike a Go

The biggest story of the week happened Wednesday when the Federal Open Market Committee voted unanimously to raise short-term interest rates from a zero-bound, where they’ve been parked for nearly a decade. The FOMC said raising rates by 0.25 percentage point was justified by improving economic data as the labor market continues to gain strength, and inflation nears its 2% objective.

On the heels of the 2:00 p.m. announcement, markets wobbled a bit before heading decisively higher on the session. David Joy, chief market strategist at Ameriprise Financial, said for its part, the Fed did a “masterful job” with the announcement process.

“First of all, they guided the market’s expectation to about an 80% probability that it would happen. So they had laid the groundwork quite well, I thought. And so far, they seem to have finessed the statement in which they said two things: They tend to be gradualistic in their approach to subsequent rate hikes, which is what the market wanted to hear. But they also talked about being data dependent.”

The committee, in its statement, also noted that “market-based measures of inflation compensation remain low; some survey-based measures of longer term inflation expectations have edged down.”

The central bank expects to initiate three to four more rate hikes next year as it forecasts a more robust economy in the U.S. over that period. Still, some doubt the nation will cross that mark. They cite concerns including persisting low oil prices, a global economic slowdown and a slowing manufacturing sector in the U.S. as headwinds.

Oil Continues Plunge

The global oil story has dominated headlines since last summer when prices plunged thanks to oversupply in the market place. Unfortunately for investors, that glut hasn’t eased any – and some expect those pressures to remain well into 2016.

OPEC, at its latest meeting, said it has no plans to cut production – which is helping keep crude prices near seven-year lows – as it aims to keep the pressure building on U.S. shale players, for whom it costs more to produce.

On Friday morning, West Texas Intermediate crude prices hit $34.41,their lowest level since February 18, 2009. By the end of the session, though, prices recovered some lost ground and settled at $34.55.

Joy said it appears there’s no sign of stabilization in the energy patch and prices continue to plunge.

“You can anticipate more supply. At the same time, a higher rate and maybe a stronger dollar, given the Fed’s diverging policy as it relates to other central banks, does imply that the energy patch is going to come under pressure,” he explained.

He continued by saying by the start of 2016, more smaller, highly-leveraged companies in the space will find it difficult to rollover their debt….and that spells more pain for the industry.

“The first half of the year is going to be a real struggle. And that’s going to weigh, by the way, on the entire S&P 500, at least in terms of aggregate earnings growth. It doesn’t look like we’ll get any help from the energy sector,” Joy said.

Hated Pharma CEO Charged with Fraud

Martin Shkreli, a now former CEO of Turing Pharmaceutical, was arrested and charged with fraud on Thursday. You may recognize his name after he came under scrutiny and faced backlash from both Wall Street and Main Street for hiking the price of a component of a potentially life-saving AIDS treatment regimen by more than 5,000%. The drug price went from $13.50 to $750 while Shkreli served as CEO of Turing.

On Friday, Shkreli resigned from the company in the wake of his arrest and the charges brought upon him.

Federal prosecutors accused Shkreli of orchestrating a Ponzi scheme on investors of his former hedge fund, MSMB Capital Management, and Retrophin – another pharmaceutical company that Shkreli founded. Prosecutors charged him with misappropriating funds, lying about investment returns and conspiring to defraud Retrophin by issuing stock in an effort to settle personal financial matters. The Securities and Exchange Commission filed parallel civil charges.

Shkreli, who pled not guilty at the arraignment shortly after his arrest, was allowed to walk later that afternoon when he was released on a $5 million bond package.

Next Week: Christmas Cheer + Economic Deluge

Christmas might be next week, but there are bound to be investors stirring on Wall Street as they anxiously wait to see whether Santa will deliver the year-end rally they’ve all been waiting for. Indeed, there will be no shortage of economic data to parse ahead of the Friday holiday when both stock and bond markets are closed.

Here’s what to keep an eye on next week:

  • Monday: No significant releases
  • Tuesday: Third GDP reading, existing home sales
  • Wednesday: Durable goods, personal income and spending, new home sales, consumer sentiment
  • Thursday: Weekly jobless claims
  • Friday: Christmas – stock and bond markets closed