We're roughly half way through February and globally stocks continue to head lower on really high volatility. Investors have been rightfully nervous watching the major averages swing wildly over so many days. Here are a few statistics showing just how crazy stocks have been this year:
Number of trading days this year - 27
Number of days the Dow Industrial Average has closed more than 100 points - 20
Number of days the Dow Industrial Average has closed more than 200 points - 13
Number of days the Dow Industrial Average has closed more than 300 points - 4
As of yesterday, the Dow is down about 8.5%. These figures don't include today which has been down as much as 420 points.
There is clearly a lot going on here but the question remains, "what's driving this?" There is no shortage of commentaries trying to justify why the markets are down and where things are headed. We too have written several articles sharing our thoughts on the subject. To name a few reasons, we have oil prices, slowdown in global growth, central bank policy changes, the presidential election and the fact that its earnings season. The list could go on. These and other factors are all legitimate concerns, but some are more important than others.
Our position has been that the news related to the energy market, and oil in particular, is the biggest contributor to the volatility we've seen. The proof is in the close real-time correlation between futures prices on oil and the intraday moves in the stock market. In fact, today there was a news release from OPEC that the cartel will be meeting to discuss cutting production. Within minutes, stocks rallied 200 points and this is consistent with what we've seen for the past several months. The biggest moves down in the stock market have occurred when oil dropped below $30 per barrel.
So why is cheap oil such a bad thing? We honestly don't get it either. Originally, the fear was related to the impact on the industry in general, employment and how that would affect certain segments of the financial markets, such as the high yield bond market. Now the discussion has shifted to whether or not the decline in oil prices is an indicator of a significant global economic slowdown (i.e. recession).
We firmly believe that oil is the real culprit in this market. Focusing on that, we believe that stocks are greatly oversold now. We acknowledge the stress in the energy market is real and there could be some spill over into other areas of the economy. But this still is very much an industry specific issue and accounts for a modest percentage of our GDP.
We also think that there is validity to the economic slowdown concerns. But offsetting any negative economic forces is this huge reduction in energy prices to the consumer and businesses alike. I'm sure we've all seen it firsthand. It took $23 to fill my car up the other day. That's down from about $55. Now imagine how that will affect FedEx or Delta.
Transportation isn't the only beneficiary of lower energy prices. Materials such as concrete and aluminum use a tremendous amount of power to produce. The benefit of lower energy prices should be felt throughout the economy. This is a stimulus package that no tax decrease could ever produce.
Our guess is that this year will end up being pretty mediocre for stocks and bonds. This has been, and continues to be, our investment thesis this year. Despite weak growth, the Fed is under immense pressure to raise rates, which should put a lid on bond prices. The global economy is slowing. Even though the U.S. economy is in better shape, it's hard to see corporate earnings increasing much in this environment and we view the lower energy prices as more of a hedge against a recession.
Number of trading days this year - 27
Number of days the Dow Industrial Average has closed more than 100 points - 20
Number of days the Dow Industrial Average has closed more than 200 points - 13
Number of days the Dow Industrial Average has closed more than 300 points - 4
As of yesterday, the Dow is down about 8.5%. These figures don't include today which has been down as much as 420 points.
There is clearly a lot going on here but the question remains, "what's driving this?" There is no shortage of commentaries trying to justify why the markets are down and where things are headed. We too have written several articles sharing our thoughts on the subject. To name a few reasons, we have oil prices, slowdown in global growth, central bank policy changes, the presidential election and the fact that its earnings season. The list could go on. These and other factors are all legitimate concerns, but some are more important than others.
Our position has been that the news related to the energy market, and oil in particular, is the biggest contributor to the volatility we've seen. The proof is in the close real-time correlation between futures prices on oil and the intraday moves in the stock market. In fact, today there was a news release from OPEC that the cartel will be meeting to discuss cutting production. Within minutes, stocks rallied 200 points and this is consistent with what we've seen for the past several months. The biggest moves down in the stock market have occurred when oil dropped below $30 per barrel.
So why is cheap oil such a bad thing? We honestly don't get it either. Originally, the fear was related to the impact on the industry in general, employment and how that would affect certain segments of the financial markets, such as the high yield bond market. Now the discussion has shifted to whether or not the decline in oil prices is an indicator of a significant global economic slowdown (i.e. recession).
We firmly believe that oil is the real culprit in this market. Focusing on that, we believe that stocks are greatly oversold now. We acknowledge the stress in the energy market is real and there could be some spill over into other areas of the economy. But this still is very much an industry specific issue and accounts for a modest percentage of our GDP.
We also think that there is validity to the economic slowdown concerns. But offsetting any negative economic forces is this huge reduction in energy prices to the consumer and businesses alike. I'm sure we've all seen it firsthand. It took $23 to fill my car up the other day. That's down from about $55. Now imagine how that will affect FedEx or Delta.
Transportation isn't the only beneficiary of lower energy prices. Materials such as concrete and aluminum use a tremendous amount of power to produce. The benefit of lower energy prices should be felt throughout the economy. This is a stimulus package that no tax decrease could ever produce.
Our guess is that this year will end up being pretty mediocre for stocks and bonds. This has been, and continues to be, our investment thesis this year. Despite weak growth, the Fed is under immense pressure to raise rates, which should put a lid on bond prices. The global economy is slowing. Even though the U.S. economy is in better shape, it's hard to see corporate earnings increasing much in this environment and we view the lower energy prices as more of a hedge against a recession.
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