As February winds to a close, the financial markets continue experiencing higher than normal levels of volatility. Since our last update in January, global stock markets have ridden a rollercoaster mostly tied to the ups and downs of oil and gas prices.
The significant decline in energy prices have certainly resulted in earnings setbacks for much of the oil and gas industry, which makes up 4.3% of the total United States economy. The large majority of rest of the American economy is benefiting from the lower cost of crude oil, gasoline, heating oil and jet fuel. As we mentioned in our letter last month, these lower energy prices will help spur growth and lessen the likelihood of recession in 2016. We have been encouraged to see recent improvement in consumer spending, broader credit growth, lower unemployment and positive wage growth. Additionally, the recent dramatic volatility in the markets has lessened the likelihood Janet Yellen will increase interest rates to the extent she had suggested in December.
On the other hand, the U.S. dollar’s continued strength has been a headwind to S&P 500 earnings. The move to negative interest rates by Japan and several Northern European countries, together with the nature of this year’s presidential election creates uncertainty. As we all know, financial markets dislike uncertainty. The beneficiaries of the recent volatility have been sovereign government bonds, and for the first time in several years, gold. This “flight to safety” has pushed U. S. 10 year Treasury yields lower and boosted gold prices.
The contradictory influences of these many factors, suggests to us that the financial markets are not yet out of the woods.
Low energy prices are already reducing oil industry spending. This historically has decreased supply, which is necessary before energy prices can stabilize and recover. Our research anticipates this occurring in the second half of the year. Future stability in energy prices will remove one of the major uncertainties and create a more benign environment for the markets. In a world where central bank policy is less accommodating and less potent, volatility is likely to remain above average throughout the first half of 2016.
Pacific Wealth Management investment portfolios remain very well diversified and built to effectively weather these volatile markets. Please feel free to call us if you have any questions or comments.
This commentary contains forward looking statements and opinions. These opinions may not develop as predicted. It is our goal to help investors by identifying changing market conditions. However, investors should be aware that no investment advisor can accurately predict all of the changes that may occur in the market.