Why Cheap Energy is Making Stocks Cheap Too

The price of energy is falling and stock prices are currently following the trend. We are getting lots of questions on this. The short answer is:  investors do not like uncertainty.

 

The issue is not that the markets don't like cheap energy (obviously low price fuel puts more cash in the pockets of American consumers, which is good for businesses.)

The issue is that the US is no longer the world's largest importer of foreign oil--- we are now producing our own abundant, cheap energy.  This is causing Russia and OPEC nations to experience massive declines in demand for their oil.  

This is a major structural shift in the global economy.  For countries like Russia, oil is a primary engine for their economy.  They have to sell oil to pay their bills. As the price of oil falls, they have to sell more to bring in the same amount of money.  That works for a while… until there is no one looking to buy more oil because all the global reserves are full.

It's not just Russia.  OPEC nations, many Central American nations, and other energy rich economies are facing this problem also.  This causes economic uncertainty. Someone is going to have to scale back production and ultimately come up short on the money they anticipated receiving (unless suddenly the world can start using a whole lot more fuel in a hurry - which is not likely.)

As a result, we see investors selling out of the narrow band of investments that have performed well this year as the strategists and economists try to discern what happens next in this global power shift.

From a behavioral finance perspective, we don't see this as anything other than normal investor behavior. Market pullbacks caused from temporary uncertainties are a normal part of investing.  

For long term investors (most of our clients) market pullbacks offer opportunities to add money to investments at discounted prices that could bode well in the long run. Saving money at the pump and saving money on your investments (by purchasing cheaper stocks) can be a good thing in the long run.

 

Bottom Line:  The energy hype is one of many reasons that can trigger market volatility.  Expect the media to sell a story of doom and gloom from our changing global energy markets (because fear gets good ratings).  In the meantime, enjoy the noticeable amount of extra money each month you get on lower fuel costs.

 


Feel free to contact us if you have questions or would like to discuss your specific portfolio. We appreciate the continued confidence and the opportunity to serve you and your family.
 
Best Regards, 
Lyn

 

December 2014

 

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