Crashing oil prices looked like the black death for the stock market. Then the market had its best two days of the year and is now back in record territory.
So is the oil shock over?
It depends. If you’re a worker in the energy industry and live in Texas, you could feel some pain. But for everyday Americans, there’s no reason to start sweating yet.
The U.S. economy is strengthening, and the Federal Reserve will seemingly will do anything to appease the stock market (you can thank Federal Reserve chair Janet Yellen for the 421-point rise in the Dow last week). These two factors are the main reason that experts are bullish about U.S. stocks in 2015.
While there could still be market wobbles in the coming days, your portfolio’s oil troubles may seem like a distant memory soon.
Oil stimulus: At its core, the U.S. economy is a consumer-driven one. So cheap gas is never a bad thing.
“Pull up to the pump at any gas station, and all you see are smiling faces,” wrote Wells Fargo Advisors Senior Equity Strategist Scott Wren in market commentary last week. “And since these are Americans with dollars to burn, our guess is that this new-found money will indeed be spent – and spent quickly.”
Yellen called these low prices a “net positive” for the U.S. economy, despite the headwinds it’s creating for the shale oil boom.
It’s not just consumers and those that cater to them that stand to benefit. Manufacturers and transportation companies should also feel the good oil vibes, Wren noted. Indeed, airlines have already taken off big time, partially due to inexpensive jet fuel.
Upbeat economy: Despite some signs of weakening global growth, there are signs that the U.S. economy is revving up for real this time.
Employers added 321,000 jobs in November, making 2014 the strongest year for job growth since 1999. Gross domestic product, meanwhile, grew at an impressive 3.9% last quarter.
“The U.S. economy’s role as the dog wagging the global economic tail likely will continue, with the robustness of the U.S. economy allowing it to buffer any global shocks,” said strategists from Russell Investments in their 2015 outlook report.
Fed lovefest: Since the financial crisis, the Fed has been the best friend the market could ask for. And that bond doesn’t appear to be breaking any time soon.
While investors had been nervously playing the guessing game trying to figure out when interest rates will rise, the Fed signaled earlier this week that it plans to take its sweet time in deciding when to do so.
That helped spark the biggest single-day rally in the Dow in over three years this week.
“The Fed is clearly cautious about doing anything that could damage the economic recovery,” noted USAA Investments in a research report. “Absent any notable increase in inflationary pressures, we believe the Fed will embrace ‘lower for longer’ when it comes to rates in an effort to solidify economic growth.”
There’s always a ‘but’: For all the reasons stock investors shouldn’t worry about oil, there are things to keep an eye on. The energy sector, for instance, could be in for a long struggle if oil prices remain depressed. Companies with less than stellar credit that borrowed heavily to finance projects could be in particular trouble, and any defaults could reverberate across the wider high yield debt market.
Even the big guys like Exxon Mobil and Chevron could feel the pain, asserted Fadel Gheit, an energy analyst at Oppenheimer and Co. Those stocks have the potential to affect the broader market because of their mega market capitalizations. Some large energy producers, like ConocoPhillips, have already said they’re cutting back spending due to the drop in oil prices.
Gheit predicts a wave of consolidation in the industry. He argues that as stand-alone entities, it will be almost impossible for energy companies to match the expected earnings’ loss through cost cuts alone.
“The industry is ill-prepared to face the current levels of oil prices,” he asserted. “The industry became complacent and they dropped their guard.”