Any time an asset or commodity falls 50% or more over a six month time frame, it is bound to make news. The continuing fall in oil prices has certainly been headline news as most consumers welcome falling energy prices. Unfortunately, the panic in the energy patch is not necessarily an unalloyed benefit for consumers.
The economy is a complex beast. Dislocations in the economy are never one-dimensional and cannot be confined to one sector such as energy, or in the case of 2007, subprime mortgages. In financial panics, such as we are witnessing in the energy patch, there are always winners and losers. The media tends to focus on the winners, and this may give a distorted picture of what is happening in the broader economy.
One third of the capital expenditures by S&P 500 companies are in the area of energy. Much of the new job growth during this recovery phase of the economy has been in the energy arena. If prices continue to fall and or stay at present levels, there will be rising unemployment in the US. While airlines stocks may profit from lower energy costs, airplane manufacturers such as Boeing and Airbus will find their earnings falling as airlines slow their purchase of more fuel efficient planes.
One sixth of junk bonds are financing energy start ups such as frackers and banks that lend heavily to the energy sector could find themselves in trouble if prices stay low for an extended period of time. The recent volatility in the stock market is evidence that investors are feeling more uncertain about the prospects for companies than they were just a few months ago.
This uncertainty, when the market is moving in one percent increments on a daily basis is a marked difference from 2014, when the average daily movements were half what they are this year and were also in a positive, rather than a negative trajectory.
A significant negative of falling energy prices is that it will tend to stall many worthwhile initiatives to reduce our carbon footprint. With climate change based on human emissions a scientific fact, what may look appealing to us in the short run, namely lower prices for carbon based fuels, may create climatic mayhem in the long run.
At this point, no one has an accurate picture of where energy prices will bottom. Until we have more visibility on the longer term outlook for energy prices, expect to see continued volatility in the financial markets. We know that volatility is often the price that investors must pay to beat the fixed returns offered in bank accounts. So while we are in a period of adjustment, it is not necessarily the case that the bull market is over just yet.
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