When is bad news for the market really good news for the consumer? When the headline reads “Stocks Sell Off More Than 1% as Commodities Slump.” Consumers look to be catching a break on food and energy prices. Apparently the supply/demand (or anticipated demand) scale presently weighs heavier on the supply side. And this is where markets work their magic. As it relates to oil, for example, prices trade lower to compensate for shrinking demand; inspiring the consumer to reschedule the once-cancelled road trip, to take advantage of cheaper air fare or cruise tickets. Or simply saving a few bucks on gas that can be invested for the future or used in some other life-enhancing pursuit.
As for businesses, this kind of bad news isn’t all that bad either. While the majority have been reporting expectation-beating earnings of late, helping push the major averages to all-time highs, stock market cynics—the poor blokes who stayed with their cash—love to point out how these earnings are largely the result of cutting expenses, as opposed to a pick up in business. And that is indeed a big part of the story. I’m, however, in the camp that says earnings resulting from cost-cutting are earnings nonetheless. The fact that companies, by and large, have managed their affairs and their balance sheets very well coming out the last recession is a reason to be longer-term optimistic. Of course lower energy costs (who knows for how long?) only complement that story…
Bottom line; while 15% of the S&P 500 Index is represented by energy-sector companies—whose stocks will waver when energy prices wane (potentially taking other sectors with them)—lower energy costs are ultimately a net positive for the economy and the overall market.
If you’re longer-term bullish on energy, as I am, I wouldn’t be rattled by recent volatility. The price and production of oil, for example, can be influenced by a number of factors, including; energy consumption, production, inventories, spare production capacity and geopolitical concerns. Even shorter-term, trading activity in futures and equity markets can move the price measurably. Longer-term, when we consider the emerging markets, productivity gains through enhanced technologies, etc., we can conclude that the energy sector will remain an important component of a well-diversified portfolio…