What a busy week. We’ve seen a lot of economic news, most of which is negative for the economy, stocks and bonds. The trade report released on Thursday revealed that the U.S. is on track for a $600+ billion annual trade deficit in goods and services – a high we haven’t seen since President George W. Bush was in office. The arrest of Huawei’s deputy chairwoman and CFO Meng Wangzhou scuttled attempts at a trade truce between China and the U.S. That and more happened by Thursday. And then, on Friday, after the markets closed, we had a flurry of more bad news.
1. OPEC and non-OPEC countries (i.e. Russia) agreed to cut production by 1.2 million barrels/day beginning in January 2019. This is to stabilize the price of oil, which fell from over $75/barrel (WTI Crude) in early October to $50/barrel on November 23, 2018.
Winners and Loser of an Increase in Oil Prices
- Oil Companies. Higher prices = higher profits.
- Gold Bugs. High oil prices are positively correlated with high gold prices. This is because a high oil price is strongly correlated with recessions. During recessions, investors flock to gold for perceived safety.
- Consumers. When consumers pay more at the pump, they have less to spend elsewhere. Since consumers make up 69% of the U.S. GDP, a pullback on consumer spending can spark negative growth.
- Economic Growth. Countries that spend a lot on oil have lower economic growth than countries that are not oil-dependent. The U.S. trade deficit hit an all-time high of $762 billion in 2006 under President George W. Bush. When the U.S. was fighting two wars, the trade deficit with OPECsoared to $178 billion. The U.S. became the top oil producer in 2013, and the top natural gas producer in 2009. This helped the recover from the Great Recession tremendously. It’s important to remember, however, that when we fight wars in the Middle East, we have to purchase oil from Saudi Arabia – even if we are producing enough oil here to be energy independent.
- Investors. The last two recessions cost investors more than half of their retirement. High oil prices squeeze Main Street in all directions by reducing their household worth, while simultaneously costing them more to get to work and to try to make ends meet.
Other Big News That Dropped Late on Friday, December 7, 2018
1. Iran is exempt from the oil production cuts. In an interview with Bloomberg, HE Alexander Novak, the Russian Minister of Energy, went on record in support of Iran, saying, “Iran and Russia have been partners for a very long time. We support Iran in its urge to further strengthen trade and economic ties with other countries and we will continue doing so.”
2. General Electric announced that the company will cut its dividend to a penny. Last year the dividendwas $0.24/share. That was slashed in half in November of 2017. General Electric’s share price has taken a huge hit as a result of the dividend cuts, dropping by 78% from above $31/share in January 2017 to $7.01/share on December 7, 2018.
3. The Mueller Report. The Manafort and Cohen sentencing documents have been headline banter since they became publicly available Friday night (12.7.18). This is not the full Mueller Report. However, it puts political turmoil center stage – something investors rarely stomach well.
All of these events are tough on Main Street. The stock futures are pointing lower for next week, and then we have to deal with a Federal Reserve rate hike on Wednesday, Dec. 19, 2018. Even though the rate hike is widely expected, rate hikes have been associated with weakness in equities and fixed income.
As I’ve reported previously, bonds have been losing money all year and are predicted to become even more problematic in 2019. (Stocks, too.) The solution, however, is not market timing. Few people get it right when they try to sell everything when they are scared, and back up the truck for stock buys when they feel the market is strong. Emotions operate on a buy high, sell low plan, which is a losing strategy. Everyone wanted to buy Bitcoin in December of 2017, when it soared to a high of $20,000. Those who did are very sorry, as Bitcoin today is worth just $3,370/coin, just one year later (as of December 7, 2018). Stocks are down on the year, with a lot of volatility and could weaken next week further.
A diversified, hot plan that is annually rebalanced and underweights the over-leveraged companies and municipalities is your best strategy. Sadly, most people are not diversified, are heavily invested in companies that are drowning in debt and are still using Buy and Hope, instead of Annual Rebalancing and Modern Portfolio Theory. (Many broker-salesmen say they are using MPT; few are, however.) That’s why your first and best step is to Know What You Own. If you’re interested in an unbiased 2nd opinion, which includes a report of what you own, outlining areas of strength and weakness in your current plan, call 310-430-2397 or email info@NataliePace.com.
Happy Holy Days! Making sure that your financial house is secure enough to withstand the economic storms that are raging will help your winter celebrations to be more bright.
Article originally posted on nataliepace.com
Natalie Wynne Pace is the co-creator of the Earth Gratitude project and the author of the Amazon bestsellers The Gratitude Game, The ABCs of Money and Put Your Money Where Your Heart Is (aka You Vs. Wall Street). She has been ranked as a No. 1 stock picker, above over 835 A-list pundits, by an independent tracking agency (TipsTraders). The ABCs of Money remained at or near the #1 Investing Basics e-book on Amazon for over 3 years (in its vertical).