The big news over the past few days has been the spike in oil. This is the most constructive price-action we’ve seen in terms of a bottom so far, which will now be the big question going forward.
In terms of the stock market, the fall in oil has had a direct impact through the energy sector, which is dragging on overall earnings growth. Here's what Thomson Reuters had to say:
“The woes of the energy sector have received much attention this quarter as expected earnings plummeted along with the price of oil. Earnings growth for the sector has fallen from 6.4% at the beginning of the quarter to the current level of -21.9%. Expectations may have neared the end of their fall, however, as this week 90% of energy companies to report exceeded their EPS estimates and 60% beat on the top line. Although these companies have been beating their Q4 estimates, the outlook for 2015 continues to become more pessimistic, with analysts expecting earnings declines for the next four quarters of 59%, 58%, 51%, and 28%, respectively.”
Whether the dramatic fall in oil since last June is a net-positive or a net-negative to the global economy and overall financial stability is still up for debate. The major oil-importing regions of the globe (Europe, the United States, China, India, and Japan—the world's largest economies) should benefit and see a pick-up in growth. On the other hand, we probably haven't seen the ripple effects fully play out for many oil-exporting countries like Venezuela, for example. Without a crystal ball, one thing we do know for sure is that financial stress measures have risen over the last year as oil has fallen.
If these two things are related, then a bottom in oil should translate to lower levels of financial stress as energy-related debt worries subside. If, however, this is merely a technical bounce and we fail to stabilize, we should expect to see further pressure on the market.
Since the financial stress measures I showed in my last article are lagged, a real-time market-based indicator of risk appetite (and, hence, financial stress) is the junk bond ETF JNK. It also broke down starting around June of last year and failed to stabilize until more recently. It is now trying to move above the pattern of lower highs from last September. If it does, we'll want to see if this gets reflected in more broader measures of financial stress as well. On the other hand, if it fails and moves lower, this could spell more trouble.
Lastly, CNN Money reported today, “OPEC leader: Oil could shoot back to 0.” Although he doesn’t say whether this could happen in 1 or 5 years, he did say, “Now the prices are around -, and I think maybe they [have] reached the bottom and we [will] see some rebound very soon."
That may already be happening. Of course, if they rebound too quickly, we can kiss all that “low oil prices a tailwind to global growth” talk out the window.
