The biggest story of 2014 for financial markets was undoubtedly oil – specifically, the price collapse of the world’s most important commodity. After peaking at over $100 per barrel in June, West Texas Intermediate (WTI) oil prices fell 50% to end the year under $50 per barrel, which is a level not seen since 2009. While this has direct, negative implications for oil sellers and support industries (contract drillers, rig servicing companies, etc.), the global economic impacts of lower energy prices are profoundly positive for virtually everything and everyone else. We expect the economy and financial markets to respond favorably during 2015, as consumers and corporations fully realize the cost savings.
Volatility in stocks increased in September and continued through year-end as market participants handicapped the proximate cause of the decline in oil. Peloton believes the combination of a strong dollar and sharply increasing supply accounts for the bulk of the decline – much more so than the potential for a looming global recession that could quash oil demand. Fears of the latter, however, resulted in choppy trading for much of the fourth quarter. Stocks shook off these concerns and rallied nearly 5% in Q4 to post a full-year gain of 13.7%. We had forecast 8-9% for the year based on accelerating economic growth and strong corporate profits, both of which materialized.
Looking ahead, the economy has some strong, identifiable tailwinds as we enter 2015. Oil, for one, enters this year at roughly $46 compared to $92 at the start of last year (again, that’s 50% cheaper!). This acts like a gigantic tax cut on all consumers of oil, which includes virtually every household and company in America. The positive dollar impact via gasoline savings alone is massive. At the time of this writing, the national average price of a gallon of gasoline was $2.11. At year ago today, gas averaged $3.31/gallon. That’s $1.20 less on every gallon of gas consumed. And to put it in perspective, Americans consumed 134.5 billion gallons of gasoline in 2013, that’s per the U.S. Energy Information Administration (yes, it’s a real thing – look it up: www.eia.gov). If these levels hold, that would result in a collective savings of $161.4 billion annually. Consumers will have more money to either spend or save, and companies have lower costs, which boosts their profits. Second, fiscal policy is neutral in 2015 compared to 2014. The tax increases and Obamacare regs that took effect in 2014, hindering growth compared to 2013, will not be additional, incremental drags on 2015 compared to 2014. Finally, the interest rate environment remains benign. In fact, contrary to the consensus forecast, interest rates actually fell during 2014. The 10-year Treasury yield dropped from 3.00% at the start of 2014 to 2.17% at year-end. All of this should support another year of solid corporate profit growth. If the dollar remains strong, profits within the Energy and Materials sectors will be challenged, but at just 11.5% (combined) of the S&P 500, declines in these sectors will be more than offset by profit growth from the other 88% of the market that benefits from lower energy costs.
We expect economic growth to accelerate as a result of sharply lower oil/energy prices. As it becomes apparent that the economy is on solid footing, the Fed will begin the process of normalizing interest rates. This will further support the value of the dollar. Nonetheless, oil prices could recover somewhat as the risk of a looming demand shock diminishes.
Peloton News: 30 Years
A lot happens in 30 years, and for Peloton a lot has happened since we were incorporated as Elliott & Associates in 1985. Our newest team member and operations manager, Tamre Mullins, pointed out that 2015 is an anniversary of sorts for our company, so we would be remiss not to mention it. A number of you have been clients for all or most of our 30 years. To those of you who have been Peloton clients for one year or 30 and everything in between, thank you for your trust and for contributing to three successful decades. We look forward to serving you for the next 30 years.