Against a backdrop of the solid returns earned in 2014 by major American indexes and after reviewing a host of positive views issued by CEOS of multinational firms, with respect to the apparent health of their charges, it might be somewhat perplexing, or perhaps even mildly unnerving, for some to view the recent early year slides of the major US equity indexes. Since mid-December 2014 through today, the DJIA has retreated almost 700 points, or roughly 3.9%.
This smallish decline, while noticeable, is hardly alarming. However, one wouldn’t glean such an impression upon reviewing day to day reports from mass investment media. According to many, the sky has either fallen or will fall quite soon. Perhaps this is correct, under the proviso one is badly overweight in oil and gas production companies. However, what if you don’t own commodity investments? What is your portfolio is largely non-cyclical?
For the sake of today’s piece, let us tune out the vociferous protestations of those who are either overweight in the oil industry or in businesses that have loaned them capital; an effective point could be made that these pundits are simply talking up their book. Too, let us reject the wringing of hands and gnashing of teeth by those who are exposed to businesses that supply goods and services to producers; such businesses are every bit as cyclical as oil producers. Let us take no notice of wailings by CEOs of companies that produce or develop energy substitutes for oil; they rely upon subsidies and cost structures that are imperiled when oil and natural gas prices are inexpensive. Disregard pugnacious warnings of global unrest from rentier economies, dictatorships and/or kleptocratic, illiberal nations; they rely upon on the economic rents earned off windfall energy prices to buy their friends and fund their misdeeds.
Removal of the self-interested, the bellicose and other extraneous white noise brings to the fore one immutable point about energy that overrides all else: The world at large, and the United States quite specifically, benefit greatly from a sustained period of low crude oil and natural gas prices. America produces, more or less, 8.6 million bpd of crude while consuming roughly 18.8 million barrels per day. A price drop about $60 per barrel from the peak of 2014 produces a net benefit to American consumers of about $600 million dollars per day, or about $219 billion US over the course of a year. Annualized over one year, this represents a gross saving of about $690 for every person in the United States.
Other fast growing and/or large economies such as China, Japan, India, Germany and South Korea as well as virtually all the nations in Europe and the majority of nations in Asia benefit, to a lesser extent, from low energy prices. Additionally, while oil pricing has dominated the media, we should not understate the beneficial impacts of lower food commodity prices and other primary commodities that fell in price during 2014 and look to carry on in 2015.
In aggregate, the bundled savings from low energy prices, low food commodity prices and low commodity inputs should result in one of the most powerful consumer tailwinds in 2015 than has been experienced in many, many years. $50 spot WTI and sub $3 natural gas prices are roughly equivalent to giving a direct annual subsidy of almost $2,000, per 3 person household, in the United States. This is the sort of direct, aggressive, effective consumer stimulus that policy wonks generally can only dream of.
Using this rationale, any scenario whereby non-cyclical equities suffer periodic moderate declines should, in all likelihood, represent buying opportunities. Differing from the full-blown bull market returns of the last several years, a bifurcated market comprised of broken commodities and healthy non-cyclical companies) may result in wildly divergent returns for investors, in the year to come. I predict that 2015 will be a year that has the potential to offer superior rewards for discerning stock-pickers, as compared to indexers.