Last week, the S&P 500 declined 3.5 percent, its worst week since May 2012; the pressure continued into this week as the blue chip index shed another 1.5 percent through the first two trading sessions. But helped by the Fed’s dovish policy statement today (more on that below), the blue chip index wiped out the last two days’ losses in one stroke. Read more about A "Patient" Fed Fuels Rally 12-17-14
Driven by another rough day for oil, the major U.S. indexes all fell by more than 1.5 percent today, led by, not surprisingly, energy shares. The West Texas Intermediate crude, a benchmark for domestic crude oil, dropped 4.5 percent today and sits barely above $60 a barrel; less than five months ago it traded at above $100 per barrel. Read more about More Pain in the Energy Space 12-10-14
Earlier today, I recommended the purchase of two energy stocks that, along with the entire sector, have been beaten down this year. But both companies are among the strongest players in their respective fields. Crises often separate the weak from the strong: The best companies will emerge from the storm in better position than before, as the weaker competition fall by the wayside. When oil turns, the remaining players will thrive. Read more about Betting on Oil 12-03-14
The sharp fall in oil prices engineered by Saudi Arabia will likely be fairly short-lived, and indeed it should set the stage for the next major rally in oil. While prices could stay low for another six to nine months or perhaps a little longer, odds look good that within the next 12 to 18 months oil prices will rise much closer to their all-time highs from current levels. Moreover, oil’s drop has shortened the time it will take for commodity prices in general, whose correction began in 2011 with Europe’s recession, to bottom. All this has important implications for the short- and longer-term geopolitical and economic outlook and for U.S. investors.
For the U.S., the lower oil prices are a mixed blessing. On one hand, they will put extra cash in U.S. consumers’ pockets; on the other, the country’s most dynamic industry, energy production, will crumble. For investors, we’ll note that since OPEC first flexed its muscle in the early 1970s, U.S. stock markets have never experienced major declines concurrent with a bear market in oil prices.
The two economies that will benefit the most are Europe—at least over the shorter term—and China. Both are major oil importers, and lower oil prices are a free shot in their economic arm, giving consumers extra cash without the government laying out a penny. But China stands out as the biggest winner by far, with the drop in oil a multifold blessing over the shorter and longer terms alike.
It not only hands Chinese consumers a de facto tax cut; it also gives the yuan more freedom to follow its upward trajectory. This further boosts consumer demand while allowing China to import all the military and other technology it craves. Better times in Europe will also help offset the higher yuan as European consumer spending picks up. As a bonus, China gets to buy oil on the cheap Read more about How to Profit from the Trough in Oil 12-02-14
China gave investors an early holiday present late last week when it unexpectedly announced its first interest rate cut in more than two years. The People’s Bank of China (PBOC) reduced both its benchmark deposit and lending rates in what may mark the beginning of more stimulus on the way. Read more about To Cut or Not to Cut 11-26-14