Worst Week in 3 Years
The upside is that it has been three years since we have seen a weekly sell-off of something like 678 points (-3.8%) on the Dow. I remember back in 2008 when we’d see that in one day. This was primarily caused by some skittish behavior based on some perceived near-term uncertainty caused by falling oil prices. I’m trying to remember when the opposite happened… oil spiking really fast and the market surging up 100 points in the final hour of trading, or 678 points (+3.8%) for the week on that kind of news. Ebola was something I could see a sell-off over… but cheaper oil? Step away from the “Sell Button,” people.
My opinion? The benefits of lower oil prices will offset any risks. Falling oil prices do pose threats like damaging energy companies’ profits. Since they make up a large component of market and price-weighted indices like the S&P 500 and the Dow, sell-offs in the energy companies can leak over into other asset classes. Not to suggest 678 points on the Dow is merely a ‘leak’… but ‘overflow’ seems more dramatic so I’m going with leak.
We just simply believe lower oil prices will help economic growth in the long term. I think people will find other things to buy with the money they used to spend on gasoline and heating oil.
But it wasn’t just oil… there were worries over Greek politics too. The Athens Stock Exchange General Index lost 12.5% last week. Seriously… Greece!? With no disrespect to my Greek friends, I feel like every time there is news out on Greece it’s like telling me that the 18-year-old family dog is getting old.
So let’s move on.
One thing you are going to hear more about in the future will be concerns that the collapse in oil prices may trickle over into the credit markets. The fear is that the plunge in oil prices will make it more difficult for the highly leveraged firms to meet their loan payments. According to the Schwab Center for Financial Research, energy companies make up 15.4% of the Barclays U.S. Corporate High Yield Bond Index, versus 10.3% in 2013. The energy sector is second only to communications. Since 2010, energy firms have raised $550 billion through new loans and bonds (Bloomberg).
Research firm CreditSights, Inc. predicts the default rate for high-yield energy bonds will double to 8% in 2015.
When investors (I’m using that term loosely here) trade out of high-yield bonds, their price goes down.
Amid all of this panic over oil prices going down, there was a strong retail sales report for November that showed favorable spending trends. Oh, then there was the University of Michigan’s Consumer Sentiment Index… which hit its highest level since January of 2007. Oh, and that comes on top of November’s strong 321,000 rise in nonfarm payrolls.
So better economic news and plunging oil prices… all just in time for the Christmas shopping season. If you’ve been naughty this year, you may get Greek Bonds in your stocking instead of coal.
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David B. Armstrong, CFA
President & Co-Founder
Dave got into the industry when he discovered his passion for finance in his mid-20’s. He’s a combat veteran and served as an officer in the United States Marines Corps on both active duty and in the reserves, retiring at the rank of Lieutenant Colonel. While serving on active duty, Dave was unable to spend money on deployments, so he became a self-taught investor. Along with a few bucks cash as a bouncer, his investing performance grew to be good....
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