Alright folks, fun Friday trivia time! What do oil, currencies and interest rates have in common? Time’s up! They are all things headlines are trying to have both ways these days. Situation X is bad, but when X flips to Y—the opposite—that’s bad too! Neither perception is quite right. These factors are all basically neutral for stocks fundamentally. But the contradictory coverage shows fear persists and economic expectations remain low—great for stocks.
Take oil. Last decade, folks feared high-and-rising oil prices would crush consumers and cause a crippling recession.[i] Yet now that oil is under $50 per barrel, few are dancing in the streets. Headlines occasionally call cheap gas stimulus, but many see cheap oil as bad. Some fret it will kill the shale boom. Some extrapolate that as an economic negative, pointing to mounting layoffs and shut-down projects in America’s shale fields—a true hardship for the folks impacted, but too localized a problem to disrupt growth nationwide. Particularly since many shale fields remain profitable at today’s prices, giving them an incentive to keep going.[ii]
Many headlines warn plunging oil prices are flashing red lights warning of some impending economic crash stock markets are ignoring. But stocks haven’t ignored anything! All sufficiently liquid markets are equally efficient and adept at pricing in widely known information. In this day and age, it is impossible for oil markets to move on something stocks aren’t aware of—all markets are equally aware. Stocks know oil is down. They know the culprit is sky-high supply, not cratering demand. Energy stocks are down, because falling oil prices hit oil producers’ margins, but other sectors benefit from low energy prices.
As it happens, we don’t believe cheap oil is wonderful or terrible. We like paying less to fill our tanks! But cheap oil really just creates winners and losers. Consumers, retailers, manufacturers and oil-importing nations win. Energy firms and oil exporters lose. Total consumer spending doesn’t much budge, since cheap gas doesn’t mean folks spend more overall—some spend more on discretionary items, some pay down debt, some save. That is the boring truth, folks. But a winners-and-losers reality beats the loud chorus of “eek!”
Currencies are another one. 10 years ago, everyone feared a weak dollar. Naturally, you’d think folks would love today’s strong greenback! But they don’t. Now we’re warned the strong dollar is killing US earnings and making our exports uncompetitive. Across the pond and through the looking glass, many in Continental Europe loved the strong dollar in the 1990s because it meant their exports were cheaper. Now the euro is at 11-year lows, but they aren’t cheering! They worry the ECB is destroying their money. The truth here is boring, too. Currency moves might marginally impact trade, but there isn’t a set relationship. US imports have risen and fallen during strong-dollar runs and weak-dollar stretches. Ditto for exports. Same goes for most other countries. Over time, it all evens out.
But boring doesn’t make a good story, so many pundits take the sensationalism to 11, warning every central bank move and every currency swing or monetary policy move is a shot in a “currency war.” Even central bankers got in on the action! Headlines try to have this both ways, too! Back when the euro was stronger, some said Europe was losing a currency war. Now, with the euro ultra-low, are they “winning”? Nope! Just waging one. Confused? So are we. We have almost lost count of all the alleged currency war fighters since 2010. The US. Japan. Switzerland. China. Australia. Singapore. Heck, some said Switzerland scrapping its peg to the euro was a currency war. Never mind that the theoretical aim of a currency war is to weaken your currency to goose exports. The Swiss franc rose. Did they declare currency war on themselves? Our advice? Don’t try to understand. Just embrace the fear as a sign of sentiment.
Finally, interest rates. On one hand, headlines warn low interest rates in the US, UK and eurozone destroy savings. Bank accounts and bonds barely earn interest (or earn no interest)! On the other, they fear even a tiny rate hike will destroy this expansion. A catch 22! Which is it? We’d actually say, neither. Most folks who need long-term return probably shouldn’t rely on bonds and CDs. And it seems safe to say an economy growing at a healthy clip with a positively sloped yield curve can handle short-term rates above zero. Ultra-low short-term rates aren’t wonderful or horrible. They’re just things.
We could cite more, but we don’t want to pile on. We aren’t anti-media-ites! Actually, we kind of enjoy all this. Contradictory headlines fail a basic logic test, which is an easy sign you probably shouldn’t take them at face value when making investment decisions. Now, you might point out different people may pen today’s contradictory headlines. Fair enough. But diversity of opinion isn’t what you usually see at euphoric bull market peaks, when everyone is just sure—SURE!—stocks will rise. So take today’s contradictions for what they are: Irrational fear-mongering, a sign worry persists and expectations are low. That means this bull market’s wall of worry is still plenty high and stocks should have room to climb.
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[i] Note, high oil prices did not cause 2008’s panic. They coincided! But coincidence isn’t causality. High oil prices had nothing to do with mark-to-market accounting’s deleterious impact on bank balance sheets and the government’s haphazard response.
[ii] See here and here for more, but the Reader’s Digest version is that prices would have to stay low for a long time to severely dent output. Given existing wells’ high upfront costs, firms have an incentive to keep going—some return is better than no return.