E Fear Not, Market Will Rebound

Last year our real GDP grew 2.4 percent, primarily driven by personal consumption and fixed investments, by both residential and non-residential fixed investments. However, markets in 2015 ended up flat. That also means corporations have added one-year worth of retained earnings in their balance sheets without any market price gains. At the end of last week, markets earnings declined by 9 percent compared to last year. You can also say markets are approximately 11 percent cheaper than they were on the beginning of last year.

There are number of unknown fears and concerns that seems to  spook investors lately. In my opinion, many of these fears are caused by the faulty reasoning and improper processing of the market data.

Biggest of all the fears is: drop in oil prices. When prices go up against the fundamentals than they fall as rapidly as they grow. It was evident in the year 2000, the market crash was due to overpriced internet stocks and in 2008 same happened after overpriced housing sector. This is what exactly is happening in the oil industry. There is an abundant supply of oil from shale producers in the U.S. and as it  happens to be, U.S. is the biggest oil consumer in the world.  At one-point, barrel of oil went up to $140, encouraging more and more drilling. There is no room to store the excess oil produced in the U.S.; all those oil tankers are full and floating in the gulf.  Due to this over (abundant) supply, prices plunged and opened the door to export oil from U.S., for the first time after Arab oil embargo. 

Naturally, oil companies started cutting, drilling and slowing the capital expenditure; sure it has some impact on the economy since energy sector weighs 6.6% of S&P 500. But what about the rest of the sectors? Every sector in S&P is benefiting, either directly or indirectly due to lower oil prices., for example: chemical companies, fertilizer firms, agricultural sector and biggest of all, the transportation firms such as airline industries, consumer discretionary and staples sectors. Low prices in the energy sectors is for everyone's benefit. Last year, U.S. consumers benefited approximately $129 billion on fuel savings, which is $960 per household. If you add industrial and transportation sector savings the benefits are enormous. Low energy prices became the biggest economic stimulus both domestically and also abroad as in India and China.

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Disclosure: Long on US Equity Markets. Invested for long in personal and client portfolios.

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