Should you be concerned about falling oil prices?

KALAMAZOO, Mich. - Dec. 19, 2014 - PRLog -- Between June and the end of November, oil prices dropped almost 40% while stocks reached repeated record highs. Then, as the slide in oil prices accelerated, oil and stock prices fell together, especially during the week that ended Dec. 12. There were two important changes:

Global slowdown – Investors became increasingly concerned that falling oil prices and weak oil demand signaled a steeper slowdown in global growth. China's economy is growing more slowly than expected, Japan is in a recession, and much of Europe is near recession. Despite expansionary policies, demand for oil could continue to grow more slowly than expected.
A new world for supply – Increased U.S. shale oil production has changed the dynamics of world oil. And at the end of November, OPEC broke from its recent tradition of cutting production to maintain prices. Oil inventories have been rising – and as a result, investors began to expect lower oil prices in the future.


Positive Investment Outlook with Lower Oil Prices
Over time, consumers and companies should benefit from lower energy prices. In the past, stock prices have generally risen when oil prices have dropped, although there's likely more short-term pain for those tied to the energy industry.

Happier consumers spending more – Falling oil prices have already reduced prices at the pump to an average of about $2.60 across the U.S. That gives consumers more money to spend elsewhere and also has contributed to higher consumer sentiment readings.

Impact on companies – Although declining oil prices mean falling prices and profits for energy companies, businesses in many other sectors benefit. Lower energy costs and other input prices, combined with an uptick in consumer spending, could help corporate profits keep rising. But capital spending may be somewhat weaker than expected, as energy companies slow their spending.

Global growth – Although economic growth is clearly slowing in many countries, lower oil prices could provide the missing spark. Falling oil prices mean lower energy costs, helping consumers and many companies in the rest of the world, just like in the U.S. Lower energy costs reduce reported inflation, increasing pressure on foreign central banks to provide more stimulus, which makes such policies more likely and perhaps more effective. In addition, interest rates may be more likely to stay lower for longer, until there are signs of stronger global growth.

Prepare for 2015
Short-term changes in oil prices, just like stock prices, are almost impossible to predict – so don’t pay much attention to them. Instead, make sure your portfolio is positioned for more ups and downs in oil prices and the stock market so you can stay invested through them. To do that, make sure you own an appropriate mix of stocks and bonds. Remember, bond prices have frequently moved in the opposite direction from stocks. Your investment mix depends on your tolerance for risk and long-term financial goals, not today's market moves. And within equities, consider stocks that might benefit from lower oil prices, such as consumer staples and industrials, as well as those that can benefit when oil prices rebound. If your portfolio is prepared, then you're set to weather potential market moves.

For more information, or to open an account, set up a face-to-face meeting with an Edward Jones financial advisor (https://www.edwardjones.com/en_US/find_financial_advisor/...) in your community.

Kate Warne, Ph.D., CFA
Investment Strategist

Investing in equities involves risks. The value of your shares will fluctuate and you may lose principal.