In addition to combing thru the latest news on the Covid-19 Coronavirus over the weekend (I have found this website/heatmap to be very helpful, by the way: https://www.arcgis.com/apps/opsdashboard/index.html#/bda7594740fd40299423467b48e9ecf6), you have likely seen/read about a conflict of an entirely different construct: an oil price war triggered by a break-down of negotiations at last week’s OPEC meeting.
Essentially, the Saudi’s and the Russian’s intend to flood the market with accelerated production in order to drive the price lower. Each nation is trying to hurt the other as well as negatively impact the US shale industry, with the theory that shale oil will lose appeal when more pure options are competitively priced.
This of course is happening at a time when the global demand for oil is shrinking, courtesy of the coronavirus and its impact on consumption. Subsequently, the price of a barrel of oil has dropped 30% over night – the largest single-day plunge since the Gulf War in 1991. This may end up having beneficial consequences in the future: prices at the pump will decline (I’d wait until Wednesday to fill your tank), airlines’ largest input costs will drop (this will be more meaningful once there is more clarity on the coronavirus), and countries that are net importers of oil will experience appreciable reductions in their industrial costs of production (Europe being a primary example).
But for now, the price drop and its adverse impact on the prices of energy companies has created significantly higher volatility and negative pricing pressure on the world’s stock markets. It is going to be a very negative open for US stock markets based up on the prices of our futures as well as the performances of the international markets overnight.
4 things that I wanted to pass along as we head into the trading day:
- Going into the last few weeks, as we confronted the coronavirus and now, a second exogenous shock in the form of the global price war for oil, the US economy was starting from a position of strength, making an economic shock(s) more manageable from our starting point than would otherwise be the case. It is this strength, obfuscated as it may currently seem, that will lead us forward (with our markets emblematic) once things settle down.
- Our banking system is sound. The market’s “plumbing” is functioning properly and there is no absence of liquidity to impair financial markets.
- Look for a globally-coordinated fiscally policy response from perhaps, the G-7 Group of Countries (https://time.com/5657375/what-is-g7/). As much as the OPEC breakdown emphasizes individual interests over the greater good of, well, humanity, such short-sightedness is typically just that, short. I feel confident that cooler, coordinated heads will prevail.
- Keep in touch and do not panic. If the market opens where it looks like it will, it takes its level back to that of last summer. Broadening your time frame for analysis and testing that against your threshold for risk is appropriate at times like this and let us help you. Reach out at any time and I’ll drop a note after the close of the market today.
The views expressed herein are those of Doug Ciocca on March 9, 2020 and are subject to change at any time based on market or other conditions, as are statements of financial market trends, which are based on current market conditions. This market commentary is a publication of Kavar Capital Partners, LLC (KCP) and is provided as a service to clients and friends of KCP solely for their own use and information. The information provided is for general informational purposes only and should not be considered an individualized recommendation of any particular security, strategy or investment product, and should not be construed as, investment, legal or tax advice. Different types of investments involve varying degrees of risk, and there can be no assurance that any specific investment or strategy will be suitable or profitable for a client’s investment portfolio. All investment strategies have the potential for profit or loss and past performance does not ensure future results. Asset allocation and diversification do not ensure or guarantee better performance and cannot eliminate the risk of investment losses. Charts and graphs presented do not represent the performance of KCP or any of its advisory clients. Historical performance results for investment indexes and/or categories, generally do not reflect the deduction of transaction and/or custodial charges or the deduction of an investment management fee, the incurrence of which would have the effect of decreasing historical performance results. There can be no assurances that a client’s portfolio will match or outperform any particular benchmark. KCP makes no warranties with regard to the information or results obtained by its use and disclaims any liability arising out of your use of, or reliance on, the information. The information is subject to change and, although based on information that KCP considers reliable, it is not guaranteed as to accuracy or completeness. This information may become outdated and KCP is not obligated to update any information or opinions contained herein. Articles herein may not necessarily reflect the investment position or the strategies of KCP. KCP is registered as an investment adviser and only transacts business in states where it is properly registered or is excluded or exempted from registration requirements. Registration as an investment adviser does not constitute an endorsement of the firm by securities regulators nor does it indicate that the adviser has attained a particular level of skill or ability.