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Oil - Ignore It

Written by Ethan S. Braid, CFA on 12.29.2015

 

HighPass first commented on commodities and oil over two years ago in an article written on March 28th, 2013.  In that article, “Avoiding the Bond Bubble,” the case was made for why commodities were a poor diversification option and why oil appeared likely to fall.  Oversupply, a stronger dollar and a slowdown in China were the three headwinds noted that could eventually bring oil down.  Oil was $94 a barrel when that article was written.

 

A lot has happened to commodities and oil since March of 2013.  My concern back then, that we could see fantastic price destruction in commodities, has become reality.  Today oil trades at $37 a barrel.  Oil is 60% lower in price over the last two years and an incredible 75% below the 2008 high of $150 a barrel.

 

Recently the stock market has experienced selling pressure on days that oil has gone down in price or when the outlook for oil has indicated even lower prices may be ahead.


Why?

 

Memories of past depressions may be partly to blame.  History shows that there have been periods in time when falling commodity prices preceded depressions.  For example, the depressions of 1920 – 1921 and 1929 – 1939 experienced significant commodity price declines at the beginning stages of the depressions.  However, in those depressions, commodity (the price of steel for example) price drops were a result of lower demand.

                                                    

Lower demand from an economy in trouble is not the case in 2015.  Instead, oversupply and a stronger currency have been the primary drivers of the recent commodity declines.  The U.S. economy continues to grow.  According to the Federal Reserve Bank of St. Louis, total nonfarm payrolls were 137.3m in November 2013, 140.2m in November 2014 and 142.9m most recently.  Real GDP was $15.6t in Q3 2013, $16.0t in Q3 2014 and $16.41t most recently. 

 

Therefore, despite the decline in oil the general economy continues to grow.  An investor would be wise to disregard the daily price movements in oil as a reason to sell or buy stocks.  The economy is improving.  Dividend yields are attractive.  Credit is available.  Valuations for the stock market, while slightly above long term averages are not in bubble territory. 

 

As long as the economy continues to expand, the end result of cheaper oil is likely to be increased profits for many businesses.  Cheaper fuel results in less of a burden on businesses that must routinely buy fuel.  Cheaper fuel means consumers will have extra funds to spend on both services and products. Forget oil and stay invested

 

 Ethan S. Braid, CFA

President

HighPass Asset Management

800 – 672 - 7916

www.highpassasset.com        

 

About the author of this article.

Ethan S. Braid, CFA is the founder of HighPass Asset Management – an independent, fee-only, registered investment advisory firm with a fiduciary duty to the clients it serves.  Mr. Braid has been passionate about managing client investment portfolios and providing customized financial planning advice since he started working in the investment industry over 16 years ago. Mr. Braid earned a BS in finance from Robert Morris University, an MBA from Cleveland State University and he is also a CFA charterholder.  The CFA program is a graduate level, globally recognized, multi-year program with a focus on investment knowledge.  Candidates for the program commit an average of 900+ hours of cumulative study time to complete all three levels.

Mr. Braid is devoted to being an expert in the field of wealth management for high net worth individuals and families and for many years, has read one book per month on subject areas such as:  estate planning, retirement planning, investment analysis, mergers & acquisitions and behavioural finance.  Mr. Braid also has a passion for business history with a focus on the late 19th & early 20th centuries.  To date, Mr. Braid has read 65 books on the subject areas above.

When Mr. Braid is not helping clients, he enjoys: cooking, wine, exercise, his yellow Labrador retriever, fly fishing, hiking, travel, playing guitar, snowboarding and duck hunting.  Mr. Braid is a committee member of the Denver Chapter of Ducks Unlimited.

This article is provided by HighPass Asset Management for informational purposes only.  No portion of this commentary is to be construed as a solicitation to buy or sell a security or the provision of personalized investment or legal advice.