January 2016 was not for the faint of heart. As the barometer shows below, bonds were up, but stocks were down almost 5%. At its lowest point last month, the S&P 500 was down over 11% already giving 2016 its first correction. Overwhelmingly, the fear is a result of continued energy price weakness.
With the oil surplus created from our shale development, coupled with a potential slowdown in China, tripled with Iran’s sanctions being lifted all have created a glut of oil that may keep prices low for an extended period of time. Obviously, cheap oil generally leads to cheap gas. This is great for consumers and numerous industries that rely on energy to manufacture goods and transport materials or products. It is horrible for energy companies, especially those new enterprises that were just breaking even when oil was at $60-$80/barrel.
Who else is hurt by cheap oil? Countries with heavy exporting of oil are suffering (think Russia, Saudi Arabia, Brazil), but emerging market swings don’t generally harm a nest egg the way we have seen this market react. Alternative energy companies like wind and solar energy providers see the demand for their products dwindle during times like these. You can imagine that the financial institutions lending money to energy companies are a little uneasy as well. Jobs will eventually be shed as oil companies can no longer afford to keep all the rigs operational. So will this spread throughout our economy? The bears are expecting it to, but let’s see how stocks have responded to past steep drops in oil.
The table on the left shows that stocks perform pretty well after a bottom is reached in oil prices. This is what you would expect in an economy where manufacturing and consumption are such a huge contributing factor toward GDP growth. Alas, we can’t assume history will repeat itself and we can’t even say we have seen the bottom in oil prices yet. However, as difficult as “holding the line” may be, we still believe that patience will be rewarded.
Our first glimpse of February is bringing us more volatile markets. If your patience is being tested, then come see us to review your plan and get some peace of mind.
Index information is used to represent market performance, but you cannot invest directly in an index. Past performance is not indicative of future results.
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