Is the US economy heading for a recession? Has an unstable China doomed our own home turf? Headlines on CNBC and our nightly news make it sound like we are heading into a recession, but the real question needs to be whether markets drive a recession or is it something else? A bear market in stocks (meaning stocks fall more than 20%) or even a correction in stocks (meaning stocks fall 10% or more) doesn’t have to coincide with a recession. In fact, the market isn’t what causes a recession. A slowing in our economic growth is the true definition of a recession.
Here’s the good news, we aren’t seeing a slowing in our economic growth on our side, meaning it doesn’t seem like we are heading towards a recession right now. It can be easy to confuse a recession with a stock market downturn. Let’s be honest, it can be boring to talk about the different economic metrics. What is more interesting is to talk about the stock market, and what the media loves even more is providing us with information that scares us. Ultimately, this translates in the media associating a falling market with a bad outlook for the U.S. overall.
That’s not the way that we should look at the markets. We need to take a step back and understand why the markets are falling. Right now the markets are falling due to uncertainties. Those uncertainties range from whether the Fed will raise rates at their meeting this month, to China’s economy stumbling, to the drastic fall in commodity prices. The stock markets are trying to make sense of everything and determine how it will impact companies.
What’s interesting is that while we’re worried about the stock market falling because the commodity prices are falling… we haven’t been complaining about the price at the pump lately. Low gas prices are actually a positive for us as consumers. Falling commodity prices are really only bad for those who work within the energy space. If you own land that has oil on it or if you work within the energy sector like at Exxon or Chevron, then falling commodity prices are certainly a negative right now. However, for those of us that are always looking to find ways to reduce our budget a little bit more so we can increase savings, falling oil prices are a great thing!
At Wela, we are always trying to give ideas on how to improve your savings without cutting costs too much. The fall in oil prices helps almost everyone driving a car, truck or SUV do that automatically! While the media might be lumping the troublesome news of China’s struggling markets and the Fed decision in with the falling price of commodities as bad things, ultimately, the commodities portion is good news for us. Falling commodity prices aren’t only a good thing for the economy, but it is a good thing for the stock markets as a whole.
We have looked back over the past 115 years at each of the different stock market and commodity market bull and bear cycles. We found that a poor stock market tends to be associated with a really good commodity market, and the same is true on the flip side. A good stock market tends to be associated with a poor commodity market. Then looking even deeper, we found that energy prices tend to spike right before an economic recession.
The performance in the stock markets and performance in the commodity markets are polar opposites. As of last week, the commodity index has fallen nearly 20% for 2015, meaning people have lost $20 for every $100 they have invested in commodities. That’s a really sharp fall and goes to show that the commodity market is nowhere near a bull market or even a good market. However, considering how commodity markets and stock markets work together, then we should be seeing a good overall market longer term.
Now let’s break down the recessionary part of the equation. As we mentioned before, spikes in energy prices tend to occur prior to recessions in our economy. Right now if we look at the ETF that tracks oil (symbol OIL), the price of oil is down over 30% for the year. Again, not an appropriate trend for energy prices before a recession based on the historical trends going back to 1955.
If you’re curious as to why the trends are like this, it’s because we as Americans are such large consumers of energy, and energy is a major component of the commodity index. Being a major consumer of energy means that our economic outlook is driven based on the how well that particular commodity is doing. It is also a major driver of the input costs that are associated with goods and services that we buy every day.
Let’s take a simplistic look at it. If it costs Apple less money to produce the iPhone because of decreased energy prices, then they now make more money on every iPhone sold. That means their stock does better. When they are making more money they can continue to invest in the next great technologies which require more people and equipment which in turn helps to keep the economy rolling.
Ultimately, these factors indicate that we should not be heading into a recession which means that these volatile times in the market may provide good opportunities for investors. For those who are sitting on cash or have a 401k from an old employer still lying around, then now may be time to look at getting that money invested. Of course, hindsight is 20-20, and we have no way of knowing absolutely that we’re heading for a recession until we’re able to look back on it in the history books, but spiking energy prices have been a telltale sign for recessions going back to about 1955.
If you’re interested in “buying into the dip” remember that we can help you at Wela. We have created a technology platform that allows you to open and fund an investment account from the comfort of your home. Talk with one of our client specialist to see if this would be a good fit for you.
Disclosure: This information is provided to you as a resource for informational purposes only. It is being presented without consideration of the investment objectives, risk tolerance or financial circumstances of any specific investor and might not be suitable for all investors. Past performance is not indicative of future results. Investing involves risk including the possible loss of principal. This information is not intended to, and should not, form a primary basis for any investment decision that you may make. Always consult your own legal, tax or investment advisor before making any investment/tax/estate/financial planning considerations or decisions.