Energy House of PainSubmitted by RetireWiseCFP on January 8th, 2016
2016 is an election year with no incumbent running. That means all the candidates will go negative on the economy and its prospects. Their game plan will be to say, “Everything is rotten—but pick me as your next president! I will fix it, and all will be perfect—if you elect me as your next president.”
Since the political and media echo-chamber will be banging negative drums through November 2016, let me be first to declare that: Yes, it is true the stock market was a bit wobbly in 2015 and there will invariably be more headwinds in 2016. However, I am confident that the American economy and its people are naturally resilient and will find a way to outperform other economies in 2016. I am America and I approve this message.
Where are we now?
The negative volatility in December and the not-surprisingly negative beginning to 2016 are associated with what I call the energy house of pain. The fundamental issue is this:Is the price of crude oil so low that American energy companies (upstream and downstream) are going to go belly up? This is no longer a trifling topic because, unlike a decade or two ago, America is now a net producer, not simply a net consumer, of oil. There are now more jobs (both clean energy and carbon energy jobs) on the line if crude oil prices stay too low and for too long. There are concerns about the cascading effect on banks, the corporate high-yield debt market, and revenues in states other than just Texas and Oklahoma, as many more states are now participants in the shale oil revolution.
Where do we go from here?
2016 is going to be about disciplined action on our part. We must know what we own and why we own these companies. There should be no knee-jerk reactions to short-term noise and attention-grabbing headlines. If the companies we own are not performing, we have the courage to sell and move on. But if the companies we own are superior performers yet the market as a whole is in a bad mood about everything, we must have the discipline not to react. Yes, it may mean stock prices will be lower for the next 6 or 9 months, but the fundamentals of the American economy are still solid.
On fixed income and alternatives:
In my quarterly letter of October 2015, I wrote that the time had come for the Federal Reserve Bank to begin to raise rates. I wrote that it was time for confidence in the leadership of Chairwoman Janet Yellen. In December, after more than 8 years of cutting and maintaining interest rates, the Federal Reserve Bank did indeed raise interest rates. What is next? I think they are going to continue raising rates in 2016 until energy prices begin to rise later in 2016 and 2017.
What should we look out for?
More energy-induced turbulence and the Federal Reserve Bank continuing to raise rates until it invariably trips the economy into a recession. It is akin to being in a hospital and the attending physician continues to administer pain reduction medicine; but a continuous injection regime eventually trips the patient into a coma.
We need to keep cool as the toxic brew of negative headlines and politically motivated seeds of doubt and division confront investors. We need to keep in mind this salient truth:the American economy and its people are indeed strong and resilient. Our job amidst all to come in 2016 is disciplined thought and—more important—disciplined action.
Femi T. Shote, MSF, ChFC, CFP®
Accredited Investment Fiduciary®