At the beginning of each year, we’re inundated with economic outlooks and projections for financial markets. Virtually everyone discusses what they read, what they saw on TV, and how ‘their guy’ told them to reposition their portfolio to benefit from what’s ahead.
Our inner drive to determine what’s about to happen and prepare for it were essential for our ancestor’s survival. While we no longer have to worry about being eaten by a predator, our need to know the future is still hardwired in us. And when it comes to our money, that drive has an even greater sense of urgency. But it doesn’t necessarily help us.
Every morning my husband gets up, checks the weather, and tells me what the week ahead will be like. Inevitably, by the time three days have gone by, the weather is significantly different than what they predicted. Yet we continue to check the weather to prepare for what’s coming.
Why is it so tough to get it right? We have sophisticated weather tracking systems and scientific methods to create forecasts. But the problem is the number of variables involved. Meteorologists combine them to create a list of possible outcomes, but because there are so many, they can only give us the most likely outcome. And it can be significantly wrong sometimes.
The same is true for investing – only worse. It’s even more difficult to predict the future of financial markets, because they’re affected by the emotions of unpredictable human beings in addition to variables like weather and natural disasters.
Take the price of oil, for example.
Do any of you remember the Mad Max movie series in the 70’s that was inspired by our fear of running out of oil? Last year at this time, energy stocks were considered a sure-thing for significant cash flow and profits, as evidenced by their use in the master limited partnerships Chip Workman described in his blog last week.
But our ability to drill for oil in previously hard-to -extract places has made the U.S. the third largest global crude producer, behind Saudi Arabia. As the US tapped into its resources, OPEC did nothing to reduce its output, and we appear to be in the middle of an oil glut. The result has been a free-fall in oil prices over a short period of time.
In June 2014, the price of oil was $115 a barrel. As of January 5th of this year, it had fallen to $52 per barrel. This is good news or bad news, depending on your perspective.
Let’s look at the bad news first:
- A continuing drop in oil prices will cause the stocks of large oil producers to drop. On the day of the OPEC announcement, Marathon Oil, Shell and Exxon shares dropped between 4.2% and 11%.
- Countries like Russia and Venezuela, whose economies are dependent upon exporting oil, are facing financial meltdowns and social unrest, which will impact emerging market stocks.
- U.S. companies may cancel or scale back their shale drilling, putting an end to the employment boom going on in Texas and North Dakota.
But there’s also good news:
- US consumers are experiencing the lowest gas prices since 2009, and it is estimated that they will spend about $550 less on gasoline in 2015 vs. 2014, freeing up money to spend on other items. The Wall Street Journal reported the decline in gas prices has already amounted to a roughly $75 billion tax cut for consumers.
- Lower prices help to ease concerns about inflation, and may take the pressure off the Federal Reserve to raise interest rates to cool the economy.
- Lower oil prices may force the U.S. drilling industry to become more strategic and effective in the way they run their operations, which would be beneficial to their long-term financial success, and for the environment.
Oil may continue to drop in price, which would create all of the bad and more of the good described above. But conflict could break out again in Libya or Iraq, which would hamper oil production. China’s economy could improve and require more oil. OPEC could decide to cut back on production. All of these things could cause oil prices to reverse.
On which possible future should you position your portfolio for 2015? No one really knows, but you’ll still see and hear people confidently telling you what you should do, because they understand how badly we want someone to tell us. And it profits them to tell you what they think you want to hear.
So what is TAAG’s investment outlook for 2015?
Things will happen this year that we won’t be able to anticipate today. But when they do, we’ll use the resulting market jumps and drops to rebalance your portfolio to meet you plan. It may not feed our need to see the future, but it works.