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When Will Stocks Go Higher?

By | 2016, Money Moxie, Newsletter | No Comments

Stocks got off to a rough start in January and February as investors began to fear another recession. At the same time, consumers continued to keep the U.S. economy moving in the right direction. This divergence caused us to ask, which one is right? Are things getting better or worse? If the market is going to improve how strong will it be? Below is a list of what I think we need for stocks to move to new highs. Feel free to check the boxes if they become a reality.

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(1) Oil prices stabilize.
Investors need a dose of reality: low oil prices are good for the economy. Falling oil prices often follow, but do not lead to, recessions. What we need is for prices to stop declining so rapidly.

Oil is falling because the global supply is much
greater than demand. Even at these low prices, producers need to pump oil for cash. Fortunately, the decline is slowing. This is because demand and supply are getting close to a balanced level.

Global oil demand is at 96.5 million barrels/day and growing at 1.5%. Global supply is at 96.9 million barrels/day and is currently falling at a rate of -0.5%. This does not mean prices will move significantly higher, but they may stop falling.

With sanctions lifted, Iran could boost supply by 4 million barrels/day. Demand won’t grow fast enough to balance that much oil for a few years.

So, get used to low oil prices. They may be with us for a while–probably until several indebted producers cease oil production. At that point, oil prices could rise a little, fear over corporate debt should ease, and stocks will be more likely to climb.

(2) Political frontrunners emerge.
Who will be the next President of the United States? Investors are uncomfortable with this uncertainty, but they don’t have to wait until Election Day to feel better. With each election primary, the uncertainty diminishes.

(3) The Fed acknowledges global volatility.
What happened to “data dependence”? With its December rate hike the Federal Reserve announced that it intends to slowly raise rates in 2016 and 2017. It defined slowly as four rate hikes of 25 basis points each.

Rather than applaud transparency, investors have questioned the Fed’s determination.

Globally, central banks are doing the opposite: dropping rates to levels below zero in order to encourage risk taking, economic growth, and job creation.

(4) Evidence of consumer spending increases.
Will consumers continue to hold up this economy? The U.S. consumer represents 70% of the U.S. economy. China, on the other hand, represents approximately 2% of direct trade with the United States. That means that the consumer is 35 times more important.

Consumers are stronger than any time in the last 25 years. They are pocketing roughly $1,000 a year in energy savings. In 2015, spending increased 3% while purchases rose for autos (+5.8%) and homes (+7.5%).

With all of the good news about the consumer, the main concern is if these numbers are peaking. I think not. Unemployment is low (4.9%). Job postings are high (5.4 million). Wages and salaries increased by a reasonable and healthy level (+2.9%).

The final bit of good news on the consumer is that their debt-to-income levels are near their lowest point since the government started tracking them in 1981. That means there is still room for this 70% of the economy
to grow.

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Stocks Finish Their Worst Year Since 2008

By | 2016, Money Moxie | No Comments

“It’s tough to make predictions, especially about the future.” One cannot argue with these words from Yogi Berra, who passed away September 22, 2015. After all, conditions in the world change much more frequently than people would like. With that said, let’s review my predictions for 2015 and discuss what changed last year.

January MarketPoint_Page_2_A

(1) Oil prices will remain near their lows until a major supplier cuts production.
No major supplier cut production and oil prices did end the year lower–lower than any reasonable forecast would have stated. We began the year at $53.45 and finished at $37.53 per barrel. That’s a 74% drop from $145 in 2008.

This is great news for U.S. consumers! It’s hard to remember the last time a stop at the gas station was so cheap!

January MarketPoint_Page_2_B

(2) Job growth and wage growth will continue. Our economy averaged 220,000 new jobs per month, which is over 2.6 million added in 2015. Unemployment continued its steady decline as it fell from 5.7 to 5 percent.*

This tighter labor market should increase wages, but the increase last year in income was just 2 percent–positive, but not as strong as I thought it would be.

(3) The Federal Reserve will be more patient with rates than most investors expect. The consensus view 12 months ago was that the Fed would raise rates in June. It turned out to be December and it was just a quarter of one percent.

January MarketPoint_Page_2_C

(4) Increased volatility will continue in 2015. The S&P 500 rose 3.5 percent, fell over 12 percent, rose almost 13 percent, and then finished down for the year. The S&P 500 rose or fell at least 1 percent twice as many days compared with 2014. December, one of the best months historically, was negative by more than 3 percent.

(5) The world will not pull the United States into recession. Our economic growth rate is 2.2 percent and it appears that the U.S. economy has helped lift those of other nations around the globe.

 

*Research by SFS. Data from Federal Reserve Bank of St. Louis. Investing involves risk, including potential loss of principal. The S&P 500, S&P 600, and Dow Jones Global are indexes considered to represent major areas of stock markets. One cannot invest directly in an index. Diversification does not guarantee positive results. Past performance does not guarantee future results. The opinions and forecasts expressed are those of the author and may not actually come to pass. This information is subject to change at any time, based upon changing conditions. This is not a recommendation to purchase any type of investment.

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5 Predictions for 2015

By | 2015, Money Moxie, Viewpoint | No Comments

Oil

The Dow Jones Industrial Average crossed 18,000 for the first time in December 2014. No one knows where it will end in 2015, but I thought it would be appropriate to begin the year with 5 predictions I am comfortable with.

(1) Oil prices will remain near their lows until a major supplier cuts production. Oil prices matter as much as any price. When they drop, it is generally considered to have a positive impact on the economy. This time feels different because prices are dropping so fast. Since June 20, 2014, the price of oil has dropped over 55 percent.

Gas prices at the pump are at levels last seen in the spring of 2009 and stockpiles of oil are at record levels. Demand is down and there is no shortage anywhere.

So far, members of OPEC, Russia, and other major suppliers have been unwilling to slow the flow. Many are just too desperate for money to be the first to cut production.

As the abrupt drop in prices slows it will become clear that low energy prices are good for the U.S. economy. Americans are already reaping the benefits as sales for new cars rose by 6 percent (16.5 million cars sold) in 2014.

If you are thinking about a new car please remember that prices will eventually rise.

(2) The trend in job growth and moderate wage growth will continue. Over 5.2 million unemployed Americans were hired in 2014—the most since 1999. With unemployment at 5.6 percent, employers may have to increase wages in order to bring in more productive workers. Keep your eye on wages!

(3) The Federal Reserve will be more patient with rates than most investors expect. With slow global growth, low inflation, and a strong U.S. dollar, there just may not be a compelling reason to raise rates this summer.

(4) Increased volatility will continue in 2015. The third year of a president’s term is hands down the best historically, but we expect this year to have above average volatility. Momentum has become so positive that 2015 is unlikely to be as good as 2014.

In the coming year, we expect positive results but with greater interruptions. In other words, we expect more frequent drops like those experienced in October and December of 2014 as investors digest a combination of factors: a slow global recovery, positive job creation numbers and high domestic stock valuations.

(5) The world will not pull the United States of America into recession. The strength of the U.S. economy is the envy of the world. We are more likely to lift the global economy than to sink with it. For at least 100 years our economy has led the world and there is no reason to think that things will be any different in 2015!

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Can We Really Be Energy Independent?

By | 2013, Money Moxie, Newsletter | No Comments
U.S. Energy Production is on the RiseMajor developments that have led to a boom in the energy industry have placed the United States on track to becoming the largest energy producer in the world, surpassing Saudi Arabia and Russia.1

 

In the State of the Union address, President Obama indicated that “we’re finally poised to control our own energy future.  We produce more oil at home than we have in 15 years.”2

 

According to a Citigroup report titled Energy 2020: Independence Day, “U.S. oil and gas production is evolving so rapidly—and demand is dropping so quickly—that in just five years the U.S. could no longer need to buy oil from any source but Canada.”

 

The International Energy Agency predicts that “the United States will overtake Saudi Arabia to become the world’s biggest oil producer before 2020, and will be energy independent 10 years later.”

 

New technologies like hydraulic-fracturing, or “fracking,” have made the extraction of oil and gas from shale rock profitable.

 

In Utah, towns like Vernal and Roosevelt have had an influx of workers as oil companies race to develop new oil wells. The energy boom in Utah is just a microcosm of what is happening in the nation. More energy production creates jobs, which pump money back into the economy.  It reduces our reliance on foreign countries, which allows us to control our own future.

 

Unfortunately, energy independence by itself may not lead to lower gas prices. Canada is completely energy independent, yet their gasoline costs about the same as ours. This is because there is a global market for oil and there is one price at which it is sold.3 We may only see a decrease in prices if the cost of oil drops globally.

 

Fracking also gives us access to vast natural gas reserves. Some estimates indicate we have over a 100- year supply if consumption remains at 2010 levels.4 Higher supply and lower prices are leading to more manufacturing in the United States.

 

Many power companies are switching to natural gas to fuel their electric plants. Natural gas burns cleaner than coal. Therefore, it is easier for power plants to meet emission standards. This abundance of natural gas has also made energy bills more palatable for cooling in the summer and heating in the winter.

 

The potential benefit of energy independence is not without its hurdles. Environmental concerns, limited infrastructure, and water restrictions have slowed progress. Despite these hurdles, the race towards energy independence sprints forward. Energy independence has become a reality that may improve the economy and your pocketbook.

 

(1) Mark Thompson, “U.S. to Become Biggest Oil Producer – IEA,” CNNMoney, 11/12/12.
(2) http://www.whitehouse.gov/the-press-office/2013/02/12/remarks-president-state-union-address.
(3) David Kestenbaum, “Energy Independence Wouldn’t Make Gasoline Any Cheaper”, NPR, 10/26/12.
(4) Gerri Willis,”What Obama Can’t Take Credit For in SOTU,” Fox Business, 1/24/12.
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