|Dow||+225.48 to 17,416.85|
|S&P 500||+19.09 to 2.021.25|
|Nasdaq||+45.42 to 4,683.41|
|10-YR Yield||+.027 to 1.751%|
|Gold||-$28.70 to $1,257.20|
|Crude Oil||+$0.10 to $44.55|
There was a brief moment in time recently when corporate earnings actually made a difference for stocks. But not anymore! We’re back in “oil hell” again — with every wiggle in energy prices causing a corresponding move in the S&P 500.
Just look at what happened when oil prices breached their recent low earlier today, falling to $43.58 a barrel. Stocks dropped to their lows of the day. The yield curve flattened (a real-time, downward re-evaluation of future inflation expectations). And the Canadian dollar and other “comdols” like the New Zealand and Australian dollars sank.
No doubt those trends in oil prices and foreign currencies are strong, and have been with us for the greater part of eight months. The broad averages managed to fight off the losses in sectors like energy for a few months. But despite today’s rally, financials are starting to waver now, as is technology.
|Will we see oil fall to $10-a-barrel?|
So does this mean all hope is lost? Are we destined to see $10-a-barrel oil, even more pain in energy, and a bigger plunge in the broad averages? Or can something break the grip of oil over stocks?
Well, how about the fact that we’re seeing massive cut backs in energy investment among some of the world’s biggest players?
Royal Dutch Shell (RDS.A, Weiss Ratings: Not rated) is one of the biggest multinational energy giants. It just announced plans to cut a whopping $15 billion in exploration, production, and other capital spending over the next three years.
ConocoPhillips (COP, Weiss Ratings: B-) also said it would cut capital spending by another $2 billion to $11.5 billion. It had already lowered its target by 20 percent in December. Competitor Occidental Petroleum (OXY, Weiss Ratings: B-) slashed its plans by 33 percent to just $5.8 billion.
Those cuts mirror other announcements from smaller firms throughout the domestic and foreign energy industry. While the shuttering of projects, curtailment of drilling plans, and firing of workers won’t result in an immediate, massive drop in oil supply, they sure as heck alter the supply-demand outlook for coming months and years.
Since investors in the futures markets and energy stocks are naturally forward looking, these cuts could hasten the bottoming process. And with downward momentum at an all-time record high, and valuations at multi-year (even multi-decade!) lows, it looks too late to be selling to me.
|“It looks too late to be selling to me.”|
Meanwhile, it’s possible we could see other market sectors pick up the slack from energy. Utilities, health care, retail, and REITs are still hanging in there, and strong reports from companies like Boeing and Apple have rewarded investors in those names.
But I have to tell you, if we don’t see some stabilization soon in oil and gas — or a break in the relentless dollar rally that’s putting so much pressure on commodities — it’s going to be a bigger and bigger headwind for ALL stocks. So keep an eye on those other markets when deciding whether to commit more capital to equities.
What are your thoughts? Can stocks “get over” the moves in oil and gas, and start focusing on other fundamentals? Or do we need to see oil prices base for the S&P 500 to do so? Is there a broader deflationary message out there? Or is this short-term stuff? How are you adjusting your investment stance, if at all, to these latest developments?
The website is where you can get together with your fellow investors to hammer out some answers. So use this link to get the discussion going!
|Our Readers Speak|
So here we are, a little more than 24 hours after the Federal Reserve met and weighed in on the economy and inflation. Anyone invested in risky stocks got bloodied pretty badly by a 195-point drop in the Dow, a move that came on the heels of a 291-point decline the day before. We also saw incredibly violent moves in the foreign exchange and commodities markets, and a notable rise in volatility.
So in response to Reader Richard, who remarked: “You guys have been hammering a teaser about ‘Bloody Wednesday’ with much ado. Looks like you were off. What do you have to say for yourselves?” I’m not sure what more you want to see.
The Fed didn’t actually raise interest rates, but it continued to toe the line that it will likely raise later in 2015. The battle between global central banks on the policy and currency fronts is clearly ramping up dramatically too. That means more volatility — and multiple “Bloody Wednesdays” as a result of policy decisions made here and abroad — are likely coming down the pike.
Or in simple terms, ignore those risks at your own peril! Certainly, Reader Bill R. is one of those who isn’t. He noted:
“As a moderately knowledgeable 74-year old investor, I am getting to the point where all the global factors are beyond my capability to balance out. I am going to reduce my risk allocation by another 10 percent.”
Reader Donn H. also noted some of the increasing global risks, saying: “Yellen et. al are adjusting world currencies at an alarming rate. Look at sanctions on Russia. Drops their currency to like .03/USD? But guess what? We pay!
His verdict about what it all means: “Markets correct and stay sideways. And the poor get poorer in 2015.”
Reader Hawk was even more emphatic about what may come next. The comments:
“I believe that we are in a deflationary cycle. I think there are more goods and services being produced than can be consumed. I also think that housing development will continue to stagnate as debt levels of new buyers (i.e. college graduates with student loans) will curtail new purchases. The price of commodities e.g. oil (along with by-products) and copper are collapsing and I think will continue to do so. I also think pension plans will have a hard time getting returns they have projected mainly because of low and getting lower interest rates.”
That’s a long list of risks, Hawk, and I appreciate your view. I’m not all-in on a broad, deflationary view yet — in part because other parts of the U.S. economy are still hanging in here even as oil prices fall.
Plus, lower oil prices now are sowing the seeds for higher prices later. I say that because energy companies are now idling hundreds of drilling rigs, firing thousands of workers, and shelving tens of billions of dollars worth of exploration and production plans.
But new information comes in from the markets every day. So I’ll process it, and keep you updated on my evolving views! And if anyone else wants to add their two cents to the discussions on energy prices or currencies or Fed policies, the website is there for your use.
|Other Developments of the Day|
That rosy glow in tech-land from the earnings out of Apple (AAPL, Weiss Ratings: A+)? Yeah, so much for that! Wireless phone chipmaker Qualcomm (QCOM, Weiss Ratings: B) wiped it all away by slashing its earnings and sales outlook for 2015. The company blamed problems in China and a key customer’s decision not to use one of its latest chips.
Holiday weeks are always tricky when it comes to making statistical adjustments. But assuming last week’s initial jobless claims figures are accurate, they were an absolute blowout! Claims plunged 43,000 to 265,000, far below estimates for 300,000 and the lowest going all the way back to April 2000.
At the same time, we got some relatively ugly figures on the housing front. Pending sales of existing homes fell 3.7 percent in December, with all four regions of the country showing declines.
McDonald’s (MCD, Weiss Ratings: B-) showed CEO Don Thompson the door after several quarters of disappointing sales. Steve Easterbrook will take his place on March 1, and be charged with getting the iconic American company back on track.
As always, I welcome your comments on these stories and the other news of the day I may not have mentioned. Go to the website to weigh in.
Until next time,