PMC Market Commentary: December 12, 2014
The past weeks, there really has been one evolving story for markets and that is the sharp, sudden and largely unexpected plunge in the price of oil. For the first time since 2009, the price of a barrel of crude oil dipped below $60, and it is not clear what will halt the decline after an increasingly toothless OPEC failed to intervene and curtail production. Unlike 2009, however, today’s decline in oil is not being caused by sudden economic shocks and is not a reflection of sharply contracting economic activity. Instead, it is being triggered by massive oversupply combined with greater efficiencies globally and transition to natural gas in the United States.
The short-term effects of this price move have been negative for financial markets. Not only oil and commodities but also assets such as high-yield and emerging market bonds that are perceived as riskier and more exposed have also come under heavy selling pressure. Stocks in general have been weak, and especially stocks of companies and nations seen as dependent on oil and commodity prices.
What isn’t being factored in yet are the positive effects of these price shifts. For U.S. consumers above all, lower gas prices and likely lower energy costs for winter heating are all positive factors for consumer spending. That bolsters an already-improving picture for many Americans, along with improving job markets and slight rising wages combined with low inflation. For many companies, lower energy and input costs will be undoubtedly positive and may lead to some unexpected margin expansion in 2015.
Yes, some nations and economies that have been unduly dependent on the energy-commodity complex may suffer especially Russia and dysfunctional economies such as Venezuela. But the assumption that all emerging economies and higher-risk debt are all linked and will all sink as oil and commodity prices decline may be a stretch. 2014 saw more people go the polls globally and elect governments determined to address the challenges of the emerging global middle class. New leaders in India, Indonesia, Brazil and elsewhere are focused on that, and energy is only one element for most of those teeming, multifaceted economies. Countries with less developed systems or less functional ones, whether Nigeria or Iraq or Iran, may indeed be severely pressured, but those are also not economies that are deeply integrated or significantly impact global companies or international commerce.
So this drop in energy prices may prove more of a tailwind rather than a problem, and the short-term market reaction will thus be seen as yet another overreaction. We shall see.
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