During the first quarter of 2016, stock ownership provided a roller-coaster ride. Last week I railed against the Federal Reserve’s free money policy and its consequences. This week we examine whose ox was gored and whose geese were golden. In the short term, I think Mr. Market will continue to struggle to gauge those effects and effectively determine which assets are cheap and which are headed into another bubble or perhaps, are already there.
After falling from $59 June 30 to $37 by Dec. 31, light sweet crude oil per barrel dropped another 26 percent to $27.30 per barrel on Feb. 11. Bob Doll, chief equity strategist of Nuveen Asset Management, (whom I greatly respect) opined that oil’s plunge may have caused Mideast oil billionaires to sell stock in order to finance their country’s lifestyle. Saudi Arabia and its neighbors do not have a lot of other major sources of income, and they invest in our companies for growth and income, just as we do.
This may be a persistent headwind. I know you will not feel too sorry for them, but U.S. production of oil and natural gas has ended their control of oil prices. Their energy oligopoly is over, and these tribal governments will undoubtedly face greater future civil unrest and perhaps worse. Energy is not going to be free, and price equilibrium will be reached. It may just be too low for them to continue to live as the rich and famous.
Interestingly, oil prices usually do not have more than a 50 percent correlation to stock market results, but lately it has approached 80 to 90 percent. The day after oil’s low price, stocks headed upward in spite of many experts calling for a third bottom to develop. Some are still predicting an even worse collapse of stock prices.
With the rebound, stocks as represented by the more conservative indexes, the Dow Jones Industrials and the S&P 500, finished the first quarter with marks of a positive 1.49 and 0.77 percent respectively, not including dividends of approximately a half percent. The NASDAQ 100 and Composite fared worse and lost between 2 and 3 percent. Likewise, international stocks and small caps lost several percent.
There are several potential bright spots. Commodities other than oil stabilized with precious metals and industrial metals rising well. The dollar also lost about 5 percent of its relative value since the end of January and this will make our exports more competitive, helping the manufacturing sector quite a bit. This last point may mean that if you had counted on a strong dollar to cheapen your overseas vacation travel this year, you had better lock in your prices now. Most of us will not have that luxury, but we will try not to be too envious!
As usual, it is never a dull moment.
(Past performance is no guarantee of future results. Advice is intended to be general in nature. Statistics from Worden Brothers, Inc., TC2000 Service, 2016.)
Ron Finke is president of Stewardship Capital in Independence. He is a registered investment adviser. Reach him at firstname.lastname@example.org.