When deciding on what to write about this month, it became impossible to ignore the elephant in the room: the stock market. As of January 22nd, the Dow Jones Industrial Average is down 7.6% year to date. Ironically, this past week was the first up week of the year, despite having a day in which the Dow dropped 550 points intraday. With the stock market is off to its worst start since, well ever, I thought it appropriate to offer some perspective.
Expanding this run out beyond the beginning of the year, the Dow is down 10.18% since its recent high on November 3rd.This puts the market in what is considered “a correction”. A correction is a drop of 10-20% from the recent high. If we drop 20% or more, we would be in bear market territory.
So what’s going on here? As with most market moves, there are several possible contributing factors. Recently, the stock market has been tethered closely to the oil market. And, as you probably noticed by the prices at the gas pump, oil has been going lower. Last week, oil hit a low of $26.55 per barrel which put it down 28% year to date and well of its high of $107 per barrel 18 months ago. Two days later on the 22nd, it did rebound to $32.19, but it’s still very low. This would seem to be a great situation with lower gas prices allowing us to save money or to spend more on other things. However, it’s not quite that simple. It’s important to look at the reasons and consequences behind the drop in price.
As with any pricing situation, the price of oil is determined largely by supply and demand. More supply than demand and the price goes down. More demand than supply and the price goes up. Currently, we have the former. Let’s take a look at both sides of the equation.
Supply: There is too much oil coming out the ground. Whether it is the US shale producers, Saudi Arabia, or the lifting of the Iranian embargo, there is too much oil. Period. This is causing problems for the higher cost producers, such as the shale drillers. And, they do not exist in a vacuum. The communities around US oil production that were booming as oil prices rose have now fallen on hard times. Also, many of these producers are financed by high yield bonds and bank loans. As these debt instruments come under pressure, investors are at risk of losing part or all of their investments. These investors include banks, hedge funds, pension funds, and mutual funds, to name just a few.
Demand: Worldwide demand for oil has fallen dramatically over the last two years. This is concerning because oil is used heavily in the manufacturing process. It is short intuitive leap from low oil demand to low global economic demand. And this is the punchline of the story. Lower oil prices are a symptom of lower demand and that is what has the markets spooked. As the global economy slows, it affects the developed nations, the manufacturers (such as China), and the developing market countries who provide the raw materials.
Another headwind that the markets are seeing is the strengthening of the US Dollar. Again, this may seem like a windfall for us as imports will become cheaper as the Dollar strengthens. But, at the same time, it makes our exports more expensive to other countries. This will hurt our multi-national companies and hinder their earnings as they try to sell their goods overseas. This could also impede our manufacturing sector as their goods become more expensive and imports become cheaper.
Overall, our economy is still growing. This growth, however, may be in jeopardy. It will be interesting to see how corporate earnings come out in the next few weeks. Specifically, I’ll be watching the top line (revenues) to see if companies are selling more. This would be a great sign of continued growth.
This all may sound dire and gloomy, but it’s important to remember that corrections are a normal and healthy occurrence in the market. Even in the best of times, the stock market will not and should not go up in a straight line. Historically, corrections happen about once every 12 months. And, besides last August, we haven’t had one since 2012. So, while all this volatility may be causing heartburn for people who trade stocks everyday, for long term investors, this is just a normal part participating in the stock market. It is important to remember your investment time frame, check your allocation, and talk with your financial advisor.
Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
Check the background of this investment professional on FINRA’s BrokerCheck.
An Investment Advisor registered through CUSO Financial Services, L.P., Gavin has 22 years of experience as an advisor in the Puget Sound area.
“I believe every client is unique and deserving of a personalized financial plan that will help them reach their individual financial goals. Before I make any recommendations, I like to get to know my clients. By asking the right questions, and developing an honest, trusting relationship I can really get a sense of what’s going to work best for them.”
Gavin graduated from the University of Washington with a BA in Business Administration and started his financial career with US Bank in the Investment Department. Prior to joining Verity in 2006, he spent eight years with Piper Jaffray.
So what is Gavin’s vision for his dream retirement?
“My dream retirement would be absolutely worry free: financially, emotionally, and in every aspect of life. My finances would be in order so expenses for travel, luxuries, and gifts for the kids, grandkids, and great-grandkids would be taken care of. My kids would be financially sound, so I would be confident in their prosperity. This would give me the freedom to travel and play and do whatever it is I want to do.”
When Gavin’s not working, he enjoys spending time with friends and family, watching Husky football, and taking weekend trips around the Northwest.
Gavin is registered to transact securities business in the states of WA, OR, CA, AZ, FL, HI, ID, IL, MN, NM, NY and VA.
*Non-deposit investment products and services are offered through CUSO Financial Services, L.P. (“CFS”), a registered broker-dealer (Member FINRA/SIPC) and SEC Registered Investment Advisor. Products offered through CFS: are not NCUA/NCUSIF or otherwise federally insured, are not guarantees or obligations of the credit union, and may involve investment risk including possible loss of principal. Investment Representatives are registered through CFS. Verity Credit Union has contracted with CFS to make non-deposit investment products and services available to credit union members.
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