Lower oil prices - the flipside of the coin

Greg Dean's picture

Judging by the number of questions we have received from advisors and clients, it is clear that many of you are worried about oil prices and the impact it has on energy stocks. If you are looking for our take on this, I apologize but we don’t have a lot to say other than our strategy remains the same. We’re continuously searching for low cost producers with strong balance sheets who are managed by individuals with significant ownership positions and motivated to create shareholder value. We’re also making sure we don’t overpay for them. This strategy will remain, as it has served our clients well.

A lot has been written about the negatives, but I wanted to spend a few minutes to discuss some of the positives that accompany lower energy prices. The vast majority of client assets (80-90%) are NOT invested in oil and gas and thus, the flipside of lower commodity prices is actually beneficial.

For several years, we have been discussing some of the very exciting things that we have been witnessing across the U.S. economy. These include: on-shoring of manufacturing jobs, slow improvement in U.S. consumer activity, and a positive outlook on the U.S. unemployment rate. Lower energy prices in the current economy are akin to turbochargers in a combustion engine – powerful additives to the underlying performance. Some of the effects are starting to show:

  • Walmart had positive same-store-sales in the U.S. in the third quarter for the first time in almost two years!
  • On Friday, we learned seasonally adjusted retail sales in the U.S. beat expectations and were +0.3%
  • Consumer confidence is at a seven-year high which is good for U.S. retailers – about 20% of retail sales happen in November and December
  • Job gains are on pace for their best performance since 1999, driving unemployment in the U.S. to its lowest level in six years

The rate of improvement has begun (or we believe will begin) to accelerate. The positive wealth effect for U.S. consumers began when the housing market turned in 2011. It has since accelerated as the job market improved and has been further aided by lower energy costs. We cannot, and will not, lose sight of the risks on the portion of our portfolios invested in energy-related businesses. Although, it is exciting to think of the benefits that other businesses could see from a sustained improvement in U.S. consumer activity.

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