Oil’s Plunge Sends Markets Reeling on Oversupply Worries

Wall Street plunged into the close of trade Friday as the major averages closed out the week down more than 3%, and the price of oil dove 10%. The selloff came as traders worry about the global supply glut and what long-term impacts it might have on the market.

These are all the biggest headlines from the trading week you might have missed.

Oil Sheds 10% After OPEC Decision

U.S. crude oil prices took a deep dive, shedding 10.88% this week, and ending the five-day period well under the technical support level of $40 a barrel. West Texas Intermediate settled down at $35.62 a barrel after seeing the biggest percentage decline since December 2014, hitting a fresh 52-week low.

Andy Kapyrin, director of research at Regent Atlantic, said the plunge this week was particularly bad, but oil prices have been a major driver of market volatility since the plunge began last summer.

“What’s happened with oil is that OPEC has lost control of the price. They’re trying to get it back by being the biggest producer, pushing a lot of the high-cost producers out of the market. It won’t work,” he said.

At its meeting in Vienna last week, the oil cartel opted to keep output at current levels, and toss out its ceiling on production. Since that decision, oil markets have really only known one direction: Lower. Sharply lower.

While the OPEC and high-cost oil producers, like America’s shale companies, play chicken with the price of oil, each waiting for the other to blink first and cut production, in the long-run, Kapyrin said it’s the consumer that benefits the most because if crude oil prices are lower, savings can be passed on to prices at the pump.

But there’s been one small problem: While oil prices have been at multi-year lows since last summer, consumers haven’t shown a big willingness to go out and spend that savings – at least not at major retailers and on physical goods.

Kapyrin said instead, those consumers are opting to put money not only in their savings account, but also put it to work in other ways.

“What we are seeing is they’re using that cash to either save or pay off their debt. The only debt that’s growing these days is student debt. All other forms of consumer credit are falling. And that’s good news for the long term, we’re repairing our balance sheets,” he explained.

He expects the consumer-spending picture to perk up again as consumers feel they’ve paid off debts and are ready to spend money.

M&A Booms into End of 2015

Another year means another record pace of mergers and acquisitions. The latest in the robust dealmaking game was an announcement Friday from DuPont (NYSE:DD) and Dow Chemical (NYSE:DOW), two of America’s biggest chemical makers, who said they plan to combine in a $130 billion deal. The tie-up would be the second-largest deal of the year, behind another mega merger between Pfizer (NYSE:PFE) and Allergan (NYSE:AGN).

While some are skeptical these blockbuster deals will receive a green light from regulators before making it official, Kapyrin pointed out that it’s not your grandfather’s M&A environment. Companies are increasingly looking for heed off concern from regulators before a deal is ever even announced.

The deal between DuPont and Dow is one example, as the companies said after the merger they plan to spin off the combined company into three separate entities decided by sector. Another is the announced transaction between Anheuser Bush InBev (NYSE:BUD) and SABMiller – the two have already outlined possible divestitures to make the deal more attractive to regulators.

Essentially, gone are the days of the conglomerate.

“This trend will continue, it’s what investors want. Frankly, it makes sense. These large conglomerates get too big to manage,” Kapyrin said.

Next Week All About the Fed

Next week ushers in the moment Wall Street’s been waiting for: A rate-hike announcement from the Federal Reserve.

While it’s not guaranteed that the central bank will announce a 0.25% increase in short-term interest rates after its two-day policy meeting on Wednesday, it’s priced into the market as investors look to close out a year of speculation over central-bank policy.

“This is easily the biggest news of the year if it happens, and it’s very likely to happen,” Kapyrin said. “What does the rate hike have the biggest effect on? Obviously the stock market. But even bigger than that, bonds. Because bonds are fixed-rate instruments and of course the Federal Reserve, their target rate is going to have a big impact on that.”

Regardless of the decision – a hike or no hike – Kapyrin said there’s likely to be a lot of volatility in the market immediately following the 2:00 p.m. decision, hitting the bond markets then the stock markets. He said a rate hike would be a sign of confidence in the economy from the Fed.

While the U.S. economy might be ready for a rate rise, though, high-yield bond funds are showing cracks in the foundation as higher borrowing costs loom. On Friday, the Third Avenue Focused Credit Fund banned investors from making withdrawals as it liquidates the fund.

In addition to the Fed’s closely-watched decision, key pieces of economic data are on tap for release.

  • Monday: No significant releases
  • Tuesday: Consumer price index, homebuilder sentiment, FOMC meeting begins
  • Wednesday, FOMC decision, housing starts
  • Thursday: Philly Fed survey
  • Friday: No significant releases