Last week, I gave you hard proof of how our team predicted the oil price plunge, with great specificity and plenty of lead time.
I showed you Larry Edelson’s chart, published here 13 months and 11 days ago, that depicted the then-future oil price collapse in black and white.
Then, on Tuesday of last week, two days before the market took off like a rocket, I gave members of my Ultimate Portfolio service the natural sequel to the story — why and how the S&P almost always surges when oil prices plunge.
This is the Big Picture — fundamental and long term. It has far-reaching impacts. And it’s certainly not too late for you to act upon. So let me share our three main conclusions with you now …
Major Transfer of Wealth. Provided the oil price decline was more than just a temporary respite, the long-term impact of lower energy prices was precisely what you’d expect it to be: A massive shift in wealth from energy producers to energy consumers. It’s not rocket science. In the wake of lower oil prices …
- The companies and countries that sell oil are the losers.
- The companies and countries that buy it are the winners.
This is what makes sense. This is what actually happened. And this is what’s most likely to happen now as well.
Major Boost to Global Economy. Overall, the winners greatly outnumber the losers — there are many more governments, companies and families who benefit from cheap energy than those who suffer from cheap energy.
The 2008 Scenario Is the Big Exception. In 2008, almost everything went down in unison — stocks, oil prices, precious metals, other commodities … rich and poor countries … energy producers AND consumers.
The most consistent winners: Bond investors. Plus investors like us who saw the decline coming and actually profited from the consequences.
In any case, right now we must also ask: Is it possible that could happen again in 2015? And if so, what should we do about it? I’ll leave those answers for last.
First, let me walk you through the four case studies that are behind our conclusions …
Case study #1
The Oil Price Plunge and
S&P Bull Market of 1985-86
It’s the summer of 1985, and the conditions are quite similar to those of 2014.
Like in 2014, the price of oil hovers at high levels.
Like in 2014, non-OPEC nations ramp up their oil exports.
Like in 2014, the Saudis are anxious to regain some semblance of control over global markets. They figure that, if they let oil prices fall, it will push higher-cost countries out of the market, leaving a bigger share for them.
So, like in 2014, they effectively declare a price war by increasing their production and flooding the world market with oil.
In just five months, a barrel of Texas Intermediate crude oil plunges from a month-end peak of $30.38 in October 1985 to a low of 10.42 in March 1986.
(Note: In the accompanying charts, the scale is not the price of oil. It’s an index set to 100 at the start of each period — both for oil and stocks.)
Some pundits declare disaster. Others declare a great victory. But both admit they are taken by surprise.
Who’s the final arbiter of the debate: Stock investors.
And they either don’t give a darn — or they actually welcome the oil-price decline.
Sure, there’s a shift of investor funds from energy producers to energy consumers. And of course, we get initial dips in the market.
In the final analysis, though, the prevailing, over-powering, big megatrend is:
A 26.3% rise in the S&P 500 in 1985 and another 14.6% rise in 1986.
In sum, the fastest and deepest oil price plunge of the modern era comes, stays for a couple of years, and eventually goes away. But …
Despite all the turmoil in the world of energy … in the world of equities, stock prices just continue marching higher for two full years beyond the initial oil price collapse.
Reason: Throughout the global economy, the winners (energy consumers) greatly outnumber the losers (energy producers).
Case study #2
The Oil Price Plunge and
S&P Bull Market of 1990-91
This time the pattern is quite different:
First, crude oil prices spike higher in the summer due to the invasion of Kuwait by Iraq’s Saddam Hussein.
Then, they plunge right back down to their starting point by early 1991.
It’s big. It’s abrupt. But when the dust settles, it leaves oil prices essentially unchanged.
The stock market? It zigs down while oil prices are surging and zags up when they’re plunging. But by the end of 1990, the S&P is down only 6.6% for the year; while in 1991, it rises 26.3%.
Reason: Throughout the global economy, the winners greatly outnumber the losers!
Case study #3
The Oil Price Plunge and
S&P Bull Market of 1996-98
Oil prices fall because of OPEC’s 10% quote increase and the Asian Crisis.
The decline is equally deep. But it’s less abrupt — spread out over 23 months instead of just over five. The overall impact is similar, but with diminished shock and awe.
Again, the stock market doesn’t care or actually likes the decline. The S&P 500 is up 20.2% in 1996, 31% in 1997, and another 26.6% in 1998 (despite a late 1998 correction in the wake of a Russian debt default).
Reason: Again, the winners easily outnumber the losers.
Case study #4
The Big Exception:
Debt Crisis of 2008
Crude oil falls from a peak of $140 per barrel in June 2008 to a low of $41.68 in 2009.
Reason: The massive debt crisis and global depression.
The S&P 500 falls from a peak of 1549.38 in October 2007, to a low of 735.09 in February 2009. Reason: The same — debt crisis and depression.
Clearly, the oil-price decline is not the CAUSE of the decline in stocks. It is merely one of the many consequences of the same global crisis that impacts nearly all assets.
So now we can answer that last question: What are the chances of another 2008-style plunge in stocks and oil at the same time?
For starters, there’s one thing we know for sure: If it happens, the oil markets will not be the cause. The cause would have to come from some other kind of powerful force that slams the global economy.
Impossible? Of course not! I’m the last one to say that a Black Swan event cannot happen.
Will something like that strike soon? Very doubtful!
Yes, global conflicts are ramping up over time, but a world war is nowhere to be seen on the visible horizon.
Yes, debt collapses — especially in Europe — are probably going to return to haunt us someday, but not until we see interest rates at much higher levels.
Yes, some other Black Swan event could swoop down unexpectedly, but even in that case, we know what to do.
All of these are threats we need to be aware of. And all of these are situations that we’re prepared to respond to swiftly — when and if the time comes.
But now it’s too soon. Now, what we see is a far different scenario:
We see global conflicts, recession fears and debt scares driving a flood of capital to countries perceived to be safer havens — especially the United States. (And now, even some of the biggest, most populous emerging markets — like India and China — are among the beneficiaries.)
We see North American oil production up more than 50% over the past three years alone, reducing the need for us to import oil from countries that don’t like us — an enduring success story for our economy, even at lower prices.
At the same time, we see a U.S economy that, unlike those of Russia or Persian Gulf countries, is not reliant on the energy industry to sustain it. In fact, in all of the past three years, only 0.2% of GDP growth and a meager 133,000 new jobs came from the energy sector.
We see cheaper energy delivering big savings for consumers and big cost reductions for most corporations … stimulating more consumer spending, more capital investment, and more jobs … creating faster and healthier GDP growth … delivering fatter corporate profits, and … higher stock prices.
Just as we saw when energy prices plunged in 1985-86, 1990-91 and 1996-98.
Until that picture changes, our strategy does not change:
We ferret out the highest quality investments in the entire 12,000-stock universe we cover daily.
We invest in them prudently and deliberately.
We maintain a very fat and healthy reserve of cash, giving us the flexibility to buy more on dips … or add when the expected trends are more solidly confirmed.
We hedge against the real possibility of more troubles in Europe and Japan.
We stand prepared to take further protective action if our Bear Market Warning Model tells us the U.S. markets are headed into a major decline.
And most important, we hang our hat on the proven ability of our model — based on many years of ups and downs with trillions of pieces of information — to make money in good times or bad.
Good luck and God bless!