Earlier this year, some investors thought the key to a rising stock market was to see a big drop in the price of oil.
Well, we’ve now seen a 27% drop in the price of oil since its July 3 closing high, but, as of last Friday, stock prices were still languishing near their July lows, according to Associated Press. So, what’s the deal?
The deal is investors can be fickle. They’re prone to quickly changing their minds based on which way the wind is blowing. Oil is a good example. Here’s a brief chronology of investors’ fickleness toward oil:
• For the first few months of 2008, we kept hearing about how strong economic growth in China, India, Brazil, and other emerging economies was pushing up the price of oil and that it wasn’t a bubble, rather, it was a simple case of supply and demand.
• During that same time, the U.S. stock market weakened as investors fretted that higher energy prices would ignite rampant inflation and tip the U.S. into a recession.
• As oil prices rose to $145 per barrel in July and the U.S. stock market entered a bear market, economic pundits started suggesting that if oil prices would drop significantly, that would be the spark necessary to jumpstart our economy and fire up the stock market.
• As if on cue, by Friday, September 5, oil prices ended the day down 27% from their July 3 high, while the Dow Jones Industrial Average was up only 2% during that same period, according to data from Yahoo! Finance.
• Now, some market pundits are saying that falling oil prices are due to weakening demand from faltering global economies, according to Associated Press. That could be bad news for our stock market because strong exports have been one bright spot in corporate earnings. If export demand weakens, that could translate into lower corporate profits and lower stock prices.
That sure makes a neat and tidy narrative, doesn’t it? Wall Street talking heads love to take the complexities of investing and turn them into short stories that can be easily understood.
We’re all in favor of a good story well told, but when it comes to investing, we prefer non-fiction to fiction. Part of our job as stewards of your money is to try to separate the fictional stories from the non-fictional. And, when the story changes frequently – like it has recently – we become especially alert.
Returns through 9/5/08 |
1-Week |
Y-T-D |
1-Year |
3-Year |
5-Year |
10-Year |
Dow Jones Industrials |
-2.8 |
-15.4 |
-14.4 |
2.0 |
3.4 |
3.4 |
NASDAQ Composite |
-4.7 |
-15.0 |
-12.1 |
1.4 |
4.0 |
3.1 |
Standard & Poor's 500 |
-3.2 |
-15.4 |
-14.5 |
0.2 |
4.0 |
2.0 |
Sources: Yahoo! Finance, Barron’s. Past performance is no guarantee of future results. Indices are unmanaged and cannot be invested into directly. Three-, Five-, and 10-year returns are annualized. Assumes dividends are not reinvested.
IF YOU MAKE YOUR INVESTMENT DECISIONS based on media headlines, you might make the wrong investments.
For example, this year, the media has made a big deal out of the housing crisis, and rightfully so.
Nationwide, we are in a major housing slump with sales, prices and new housing starts all down significantly. Even the big mortgage lenders, Fannie Mae and Freddie Mac, have had to throw up the white flag and succumb to a major bailout by the U.S. Government, according to The Wall Street Journal.
As a result of the housing market devastation, one might think that the last place you would want to invest in 2008 would be in homebuilder stocks. The fact that an index of homebuilding stocks is up this year while the housing market is in a funk, leads to an important point about investing. T
he point is this: the stock market tends to be an anticipating mechanism. With homebuilding stocks up this year, it may suggest that investors are looking past the current problems and, instead, looking ahead to a potential housing recovery and positioning their portfolios to try to take advantage of it.
In all fairness, we need to take a step back here. While the homebuilding index is up this year, it was down a dramatic 47% last year, according to Morningstar. That makes sense because it wasn’t until late 2007 that housing problems started to became headline news.
When it comes to investing, you have to keep an eye toward the future. Today’s headlines are old news and typically already baked into the price of a stock.
While we can’t predict the future with 100% accuracy, we can look for clues and telltale signs. That’s part of the art of investing and, when you combine the art of investing with the science of investing, you may have a better shot at being a successful investor.
Weekly Focus – Key to Health and Happiness
Various researchers have concluded that one key to health and happiness is to actively try to become more grateful in our everyday lives, according to an article in Great Good magazine. Here are four steps we can all take toward that end:
1. Write a letter of gratitude to someone you’ve never properly thanked and deliver it in person.
2. Keep a gratitude journal of everything for which you’re grateful.
3. Savor life’s little joys that come your way.
4. Think out of the box and thank people that you might not ordinarily thank.
Give these ideas a try and see if your life improves!
Best regards,
Bruce C. Worthington
P.S. Please feel free to forward this commentary to family, friends, or colleagues. If you would like us to add them to the list, please reply to this e-mail with their e-mail address and we will ask for their permission to be added.
Securities offered through Commonwealth Financial Network, Member FINRA/SIPC. * The Standard & Poor's 500 (S&P 500) is an unmanaged group of securities considered to be representative of the stock market in general. * The Dow Jones Industrial Average is a price-weighted index of 30 actively traded blue-chip stocks.
* The NASDAQ Composite Index is an unmanaged, market-weighted index of all over-the-counter common stocks traded on the National Association of Securities Dealers Automated Quotation System.
*Yahoo! Finance is the source for any reference to the performance of an index between two specific periods.
* Opinions expressed are subject to change without notice and are not intended as investment advice or to predict future performance.
* Consult your financial professional before making any investment decision.
* You cannot invest directly in an index.
* Past performance does not guarantee future results.
