Insights / Blogs

Insights / Blogs

On The Lookout

James Swanson, Chief Investment Strategist, helps readers make sense of the markets by sharing what he learns along the way.

January 30, 2015

Some Gears Slip, Others Align

Lower oil prices and the stronger US dollar are hurting some companies but helping others.
With correlations across investment options falling, picking the right spots will matter more.
My assessment is that these changes and disruptions could turn out to be a net benefit.

The ramifications of 2014’s dramatic events in the oil and currency markets are spinning different effects around the globe. Let’s examine some of the basic concerns and uncertainties, as well as the opportunities we see for 2015.

Lower energy prices
The drop in oil and gas prices will ripple through the US economy and equity markets differently. The first difference we expect to see in 2015 is that earnings in some sectors of the stock market will slip. After the rather uniform and orderly march upward we’ve been witnessing since the business cycle began in 2009, this divergence is news.

Now, in early 2015, the fall in oil prices threatens earnings in the energy sector — of course — and among materials exporters and capital goods companies that make big machinery. As revenues fall and the previously exuberant oil and gas industry pulls back from spending on new wells and transportation, these areas of the market are going to suffer earnings hits and disappointments. The effects should be felt during the first six months of 2015.

Stronger US dollar
The second difference we are seeing this year is that big multinational companies have been feeling the negative effects of a higher US dollar. While exports are a relatively small part of the reported size and growth of the US economy, sales of goods and services outside the United States are a very big part of the S&P 500 Index. A stronger US dollar will impede the sales of many large companies.

What I expect is a trendless market from now until June. The market may be concerned about the uncertainty of non-US growth — especially the implications of the fall in oil — and will need to see some reassurance about the 2015 track of the global economy — in the US and elsewhere.

During the second half of the year, I anticipate that three signs of better times may become apparent around the world:

  1. Germany, Europe's biggest economy and a huge exporter, could benefit as the weak euro lowers the price of its exported goods.
  2. Japan, which imports nearly 100% of its oil, could experience the benefits of lower energy prices.
  3. China, another big exporter, could see improved growth as the US consumer realizes the strong US dollar’s buying power.
In the US, the lagged effects of lower oil prices should show up as a stimulus to spending. Sectors related to the consumer and companies that use energy as a base input will most likely get an earnings boost and a push forward in stock prices.

We look for the boost in spending to be felt by transportation, consumer discretionary and other areas, while automakers, chemicals and plastics could experience a lift from lower energy costs.

Among emerging markets, the stronger dollar and lower oil prices could give oil importers like China and some eastern European countries a boost, but oil exporters may continue to suffer. This is likely to remain an area where selectivity is critical, and we’ll keep our eyes open to discern the more attractive investment opportunities.

Falling correlations
So in 2015, the gears may slip in some areas and align for higher growth in others. Falling correlations among stocks, between market sectors and across countries have been the trend for several months. Different rates of growth and contraction mean that putting our investment dollars in the right spots will matter more this year.

When we look back on the data for 2015, I wouldn’t be surprised to see that more consumers and businesses were helped than hurt by lower oil prices, lower interest rates and currency adjustments. It is my assessment that these changes and disruptions could turn out to be a net benefit, and the current business cycle won’t be broken but will motor on — perhaps on a different path than we may have expected, yet still expanding in the second half of the year.

No forecasts can be guaranteed.

The views expressed are those of James Swanson and are subject to change at any time. These views are for informational purposes only and should not be relied upon as a recommendation or solicitation or as investment advice from the Advisor.