Wall Street week ahead: sliding oil prices could smudge year-end stocks rally

With Wall Street heading into its usually buoyant year-end period, continued weakness in oil prices presents a major wildcard that could spoil any holiday cheer for stock investors. With seven full trading days left in the year, plus a shortened Christmas Eve session, some investors say the market remains poised for its traditional strength to close out what has been a sluggish 2015, having moved past the Federal Reserve's historic decision to raise interest rates.
While the S&P 500 index is down 3 percent this month, December ranks as the best-performing month on average for the index since 1950, according to the Stock Trader's Almanac. Since 1969, the last five trading days of the year, plus the first two of January, have resulted in an average 1.4 percent rally.
But the recent and persistent slide in oil prices raises some doubts. The price of crude has closely correlated with the S&P 500 over the past 20 sessions as the commodity has slid toward multi-year lows.
"For whatever reason, this has been the theme pretty much ever since oil got under $50: that lower oil prices are bad for the market," said Eric Kuby, chief investment officer at North Star Investment Management Corp in Chicago.
For the year, the S&P is down about 2 percent. At 2,016 as of mid-day Friday trading, the benchmark US index would need to rally more than 4 percent to reach the median year-end forecast of 2,100 (a 2 percent gain for the year) from 46 strategists polled earlier this month by Reuters.
As US crude prices have dropped about 20 percent since late November, deepening their 1-1/2 year freefall, the S&P 500 has pulled back more than 3 percent. The energy sector, the worst-performing S&P group, slumped more than 12 percent over that time.
Goldman Sachs said on Thursday it sees a high risk of oil prices declining further.
"The oil story is not going away," said Quincy Krosby, market strategist at Prudential Financial in Newark, New Jersey. "As (US crude) continued to push downward, it is affecting the market."
While low oil prices have been thought to be a potential stimulant for the economy by lowering gas prices and putting more money in consumers' pockets, the recent drop has apparently sent a negative signal to the market.
"I think people interpret lower oil prices as a weakness to the overall world economy and therefore if there's not a real strong demand for energy, the economy is getting weaker," said Gary Bradshaw, a portfolio manager with Hodges Capital Management in Dallas.
Although stocks have slid after an initial rise, the Fed's decision on Wednesday to raise rates was largely expected by investors and signalled faith in the US economy.
"That the market absorbed the first rate hike in nearly a decade suggests that we can finish the year on a positive note," said Alan Gayle, director of asset allocation at RidgeWorth Investments in Atlanta.