While we are all here because of an interest in energy, sometimes it pays to step back and consider the overall state of financial markets. Nothing exists in a vacuum and, as sure as eggs are eggs, if the broader stock market is heading for a fall the energy sector will be dragged down with it. That particular view, that a major correction, even a collapse, is imminent, has been gaining ground in the last couple of days.
That is hardly surprising. The rally over the last five years has been strong, but over the last few months looks to be running out of steam. We have seen a major correction in many of the speculative growth stocks driven by momentum and, while both the S&P 500 and the Dow have hit record highs, each incremental increase in those records has been met by a wave of selling. That pattern is repeating itself this week.
If, like me, all of this, combined with the parade of bears being trotted out in the financial media, has you worried, it is worth considering a couple of things. First, we have heard these bears growl many times. I guess that like a broken clock they will be right at some point, but the predictions of doom are beginning to sound more like a broken record. (For younger readers, records were what we used for music before CDs, which were what we used for music before it could be downloaded.) There was no shortage of people warning of a “double dip” in 2010 or attempting to call the top all of the way through the second…
While we are all here because of an interest in energy, sometimes it pays to step back and consider the overall state of financial markets. Nothing exists in a vacuum and, as sure as eggs are eggs, if the broader stock market is heading for a fall the energy sector will be dragged down with it. That particular view, that a major correction, even a collapse, is imminent, has been gaining ground in the last couple of days.
That is hardly surprising. The rally over the last five years has been strong, but over the last few months looks to be running out of steam. We have seen a major correction in many of the speculative growth stocks driven by momentum and, while both the S&P 500 and the Dow have hit record highs, each incremental increase in those records has been met by a wave of selling. That pattern is repeating itself this week.
If, like me, all of this, combined with the parade of bears being trotted out in the financial media, has you worried, it is worth considering a couple of things. First, we have heard these bears growl many times. I guess that like a broken clock they will be right at some point, but the predictions of doom are beginning to sound more like a broken record. (For younger readers, records were what we used for music before CDs, which were what we used for music before it could be downloaded.) There was no shortage of people warning of a “double dip” in 2010 or attempting to call the top all of the way through the second half of last year. If you followed their advice, you missed out.
Second, the conditions that have led to the S&P 500 nearly tripling since the dark days of early 2009 are still in place. The financial world is still awash with cash hunting a return. The Fed is tapering, for sure, but they are still buying assets and are committed to easy monetary policy for some time to come. The Bank of Japan is in the same boat and even the notoriously hawkish ECB could soon move from talk to action.
In these conditions, stocks, and US stocks in particular, will find support. This is particularly so as long as corporate profits keep hitting new highs. This past earnings season wasn’t the best, but as of last week, 75% of companies reporting beat estimates. US and global economic growth has been slower than ideal, but that is hardly surprising coming off of a credit crisis, and it is still growth. What worries many is that the stock market has got ahead of itself due to all of that cash sloshing around the system but the evidence suggests otherwise. Earnings multiples, both forward and trailing are within normal ranges and, as we have seen with tech and biotech stocks in the last couple of months, when things do get out of hand the market has not lost the ability to self-correct.
But, the bears say, what about treasuries? Yields are still moving lower and that proves that the big money is worried. Well, if you still believe that bond and stock prices can’t go up at the same time you haven’t been paying attention for the last 5 years. Again, we come back to that ever expanding pool of cash. 10 year US Government paper may still look attractive at a 2.5% yield to some, but there is little evidence of wholesale selling of stocks in order to buy it.
I am not saying that we aren’t looking at a correction and maybe even a volatile but disappointing second quarter for stocks in general. There are also still things that could derail everything. Even if the ECB does loosen monetary policy, if their timing is out then any hint of a deflationary environment could reawaken the markets to the fact that countries such as Spain and Italy are still deeply in debt. That and any number of things could cause problems, but, for now, I remain bullish.
Energy investors in particular have had a good start to 2014 and anybody with trading experience will tell you that you are never wrong to take some profit if you are in that position. That doesn’t mean, however, that you should listen to the naysayers and panic out now. On the contrary, any weakness in the coming weeks and months will simply be an opportunity to re-invest that profit at a discount.
