Most pundits will likely look back in a few months and see the crude oil collapse of 2014 as the obvious sign that the Fed had powered another capital misallocation of grand proportions. Too much new petroleum came on line too quickly in recent years because money was free. As the year progressed crude demand softened with the weakening global GDP and the glut became obvious. It became a big problem when even a whiff of more rational monetary policy was in the air as QE3 was ending.
Fed magic had already stopped working on other markets before the shale shellacking, but oil traders and analysts were ebullient as recently as late summer. Many ignored the deflationary signals being sent. Being long oil and oil stocks was quite a popular concept among hedge funds and Wall Street. However, just a few weeks after the end of QE3, oil markets have hit levels 40% below the year’s high. Fed boom meet Fed bust. Just like that. But that could never happen to the beloved S&P 500, now could it? Will large cap equities be the last to recognize what gold, oil, and so many other markets are indicating about economic growth to all who will listen?
Obviously, energy-related capital expenditures and employment will take a major hit next year simply due to the collapse in the price of crude, shale energy equities, and high yield bonds. We know that for many quarters, fracking activity has been a huge driver of U.S. GDP, so we look for earnings pressure to emanate from that sector and spread to related industries. Although we are excited by lower gas prices, we think it is a stretch to expect the benefits to offset the hit to the industrial side of the economy from less crude exploration and production when so much job growth came from energy companies in recent years.
The views expressed on this blog are the opinions of the authors. This information is not intended as investment advice or to recommend the purchase or sale of securities. More information on Strategic Balance, LLC may be obtained by contacting investor relations.