The Dow has surged again … reversing its early-year losses … closing in on new all-time highs … and possibly heading still higher.
Moreover, this is happening despite the big oil-price collapse, despite the expectation that energy companies could slump, and despite fears of deflation which the oil market is stirring.
Why? And what is the best, most reliable way to profit? For an answer, let’s do two things together this morning:
First, let’s walk through our team’s past and current oil-price forecasts — and how they relate to stocks. (That will answer the “why” question.)
Second, let’s drill down to see how cheaper energy impacts each of the ten major industry sectors in the market. (To answer the how-to-profit question.)
Our Forecasts on Oil Prices and Stocks
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No one can forecast the future with precision, and we all must admit our share of misses. But let’s run through a quick history of our team’s forecasts on this topic …
Money and Markets, November 11, 2013: Larry Edelson warns readers that oil prices will plunge below $65 per barrel and then even further to the $50 level. Not only that, but he does so with a chart that shows the precise levels and direction of the market. (This was one full year before the oil-price decline began!)
Money and Markets, December 10, 2014: By this time, oil is already down to less than $67 per barrel, and the energy bulls are calling for a big bottom. But right in his headline, Larry insists “Oil Plunge Has More to Go!” His exact words:
“Oil is now hovering just above that first major support level. Once it cracks that, oil will plunge to as low as $40. That leg down to $40 could begin any moment, or perhaps after a short-term rally.
“The crash in oil prices is hard to believe, when there are so many diehard oil bulls out there. Even more so when you consider all the political hot-spots around the world that are now causing so much turmoil.
“But from a fundamental point of view, oil is not bullish. Global oil inventories are fine now; there is no squeeze in supplies. Moreover, as we all know, the U.S. now has more energy of its own than it’s ever had. …
“What’s driving oil lower is the same thing that is driving nearly all commodities lower. It’s called deflation. That’s especially true for Europe. The euro region is in a freefall. Almost every country in Europe is contracting, severely. Unemployment remains sky high, threatening to move even higher.
“And all across the globe, rising geo-political tensions and conflict are driving most business people and investors to play it safe, park money in cash, take risk off the table, and hoard and protect their capital and wealth. That too is deflationary, for all but the U.S. equity markets!”
Larry’s main point:
Flight capital — running from the world’s hot spots AND from deflated commodities like oil — will be very positive for U.S. stocks, especially for the highest-quality stocks on the market.
Money and Markets, December 22, 2014: We pinpoint precisely when and why the stock market surges when oil prices fall, and, again, we give you the story right in our headline — “Why the S&P Surges When Oil Plunges.”
The reasons: It’s because of major transfers of wealth — the companies and countries that sell oil are the losers, and the companies and countries that buy it are the winners. It’s because the winners greatly outnumber the losers. And it’s because of a major boost to the global economy.
That’s the history of our forecasts and the reasons WHY. Now let’s move on to …
Which Sectors Benefit The Most?
Here are our conclusions in a nutshell, based on an extensive study we’ve just completed on all major oil-price declines in the past quarter-century, focusing on the two most recent bull markets with hefty oil-price declines (1990-92 and 1996-98) …
Conclusion #1. During the oil-price declines, the three stock sectors that gave investors the best (and most consistent) performance were:
- Health care, up an average of 60%!
- Technology, up an average of 64%!
- Financials, up an average of 45%!
Conclusion #2. Move the clock ahead three months after oil prices hit rock bottom … and that’s when you start to see the benefits of cheaper energy flowing into the consumer economy.
Result: The two stock sectors that gave investors the best and most consistent performance within the first three months after oil hit bottom were …
- Consumer discretionary stocks, up 13.6%.
- Financial stocks, up 8.1%.
(That’s in addition to the 45% rise we talked about above, which they enjoyed during the oil-price decline).
Conclusion #3. Next, fast forward 12 months after the oil-price bottom, and you see that the positive impacts on the consumer economy continue to pile up, with …
- Consumer discretionary, up 24.2%
- Technology, up 35.1%
(Again, that’s in addition to the rises they enjoyed during the oil-price decline.)
How does all this compare to where we are now in the current oil-price decline? That leads me to …
Conclusion #4. Although it’s still too soon to say oil has hit bottom, what we’ve already seen during the latest oil decline confirms the pattern of earlier bull markets: Since oil began its plunge last year, the best performing sectors have been the same ones that popped up at the top of the charts in previous oil crashes. They are …
• Health care up 12.4% • Technology up 9.4% • Cons. Staples up 8.8% • Financials up 8.7% • Cons. Discretionary up 8.2%
Conclusion #5. During bear markets, driven by factors that are completely independent of oil (like a real-estate bust), all bets are off. In the 2008 meltdown, for example, almost everything got clobbered — not just real estate, but also stocks, gold, oil and other commodities.
But after the 2008 oil-price decline, if you look ahead just six months after oil hit rock bottom, you see nearly all sectors enjoying a rapid recovery. And by twelve months out, you see …
• Financials up 54.0% • Technology up 51.1% • Cons. discretionary up 50.7% • Materials up 43.0%
Our final conclusion: This validates precisely what our team has been telling you:
1. The oil-price plunge is a big extra bonus — a great gift.
2. Oil-price crashes have never caused stock market crashes.
3. But history also shows that we must always remain vigilant regarding the dangers of a bear market caused by other factors — and be ready to change course promptly when and if that time comes.
Good luck and God bless!