For Mark Roberts’ Use: In the past eight months, we’ve watched oil prices take a tumble, from highs above 100 dollars per barrel down to about 33 dollars in February. While drivers might be happy to discover low prices at the pump, some of you might be worried about what this means for our economy overall.
That depends upon whom you ask. While oil companies obviously suffer a direct hit to their profits, low gas prices translate into lower manufacturing and distribution costs for many other products. Prices on everything from food to electronics can be affected. In addition to that, consumers who found themselves strapped for extra cash while gas prices were high now have extra money in their wallets, which they can spend on other goods and services.
Generally speaking, all of that sounds like good news! And yet, low oil prices can make investors nervous and spark volatility in the stock market. That’s because a long period of oil price instability causes investors to fear the potential of low corporate profits and slowed economic growth. Case in point: US GDP weakened to 0.7 percent in the fourth quarter of 2015.
Low oil prices are generally bad news for the energy sector, as we saw in 2015 as energy stocks fell about 21 percent. Of course, energy only accounts for about 7 percent of the S&P 500 index, but the slump could still continue to drag down the overall market.
Weak oil prices also affect industrial companies that supply equipment, along with the banks that lend money to energy companies. In 2015, we saw the bankruptcy of numerous small oil and natural gas companies, and many more may be coming this year. Since energy firms are normally big spenders, we could continue to see a drop in production in industries such as mining.
We’re holding out hope that accelerating demand or slowing oil production (or a combination of both) will help to stabilize prices. A sustained period of low oil prices can sometimes have broader market implications, so this is a situation we will continue to monitor closely. The takeaway lesson here is that we should watch the situation with oil prices, but we’re not predicting a doomsday scenario at this time. It’s just as important as ever to keep your eyes focused on horizon, and stick with your long-term strategy. If you’re feeling concerned, call us to schedule an appointment, and we can help you analyze or rebalance your portfolio without overreacting to a potentially temporary situation.