Oil's down. Now what?
In last quarter's
Advisors' Outlook I highlighted the recent resurgence of domestic energy production as a long-term trend with unknown ramifications as far as the U.S. economy was concerned. OPEC responded by attempting to force U.S. production into unprofitable territory by maintaining the status quo on production levels in the face of lagging demand. The result has been oil prices below $50/bbl and gas prices that start with a '1'.
I would have thought this would be a good thing for the economy and markets. Except for the oil producers and support services, oil is in input cost for everyone else. A decline in the cost of production should result in higher profits or pass-through savings to the ultimate consumer. Good things, right?
And lower fuel costs should free up a piece of the consumer's budget to stimulate the economy elsewhere. People may use low cost gas to shift to bigger vehicles eventually, but in the short run demand is fairly inelastic - I'm not going to change my commute weekly as gas prices change. (This argues against lower oil prices being disinflationary as well. Though technically correct, the big worry of disinflation is that consumption slows while consumers wait for prices to fall further. I don't know about you, but I pretty much pay what the pump says when I'm on 'E' - up or down).
So why did the market fall nearly 2% on Monday with 'dropping oil prices' pegged as the culprit?
The mixed picture is confounding investors. The Standard & Poor’s 500 Index of U.S. equities fell 1.9 percent on Jan. 5, the biggest decline since October, as oil brought down energy shares and stoked concerns that global growth is slowing. - Bloomberg
I have no idea. Honestly, I still think benefit accrues to the consumer short term and long-term production trends favor the U.S., but the markets think otherwise. Or at least they did on Monday. Incidentally, an Oxford Economics, Ltd. analysis in the same article, agrees with my favorable assessment, at least about U.S. GDP.
As an investor, this leaves me in a bit of a pickle. Either:
- My analysis (on this point at least) is wrong -or-
- Conflicting analyses make it hard to figure out who is right
In either case, I'm better off with a strategy of a targeted asset allocation, letting the markets tell me when to buy or sell through rebalancing. The alternative is to identify someone who is a crack analyst, but for that to work, you have to identify analysts skilled in all aspects of the economy and know to balance their respective inputs. Not easy (or cheap if it truly exists) either.
For timing to work you have to have accurate predictions, accurate analysis, and the market has to eventually agree with you. Best to avoid timing at all.
For the full Bloomberg article, click
here.
