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What’s Going On With The Price of Oil?

What’s Going On With The Price of Oil?

On April 20th, 2020 something happened that has never happened before in history. The price of a barrel of WTI oil for the May contract went negative and closed at -$37.63 for a barrel. But what exactly does this mean and why did it happen? 

It’s Not As Simple as Just Supply and Demand 

The price of oil is usually determined by supply, demand, and market sentiment toward the product. With the entire global economic situation suffering from shutdowns to combat the coronavirus outbreak, the demand for gasoline has drastically reduced and looking forward is expected to remain that way for at least several months. The supply of oil which is used to refine into gasoline as well as other energy sources has been increasing to unprecedented levels. There is only a limited amount of storage capacity available globally for this oil and due to the scarcity, the price has drastically dropped this year. On April 10th, the market went negative because traders capitulated based on the fact that it is cheaper to pay to have the oil hauled away and stored than it is to build more storage capacity or to shut down the wells that are producing it. So, with this historic market event, where do we go from here?

The Unprecedented Impact of Coronavirus

Moving forward, it is likely that many of the states will begin to reopen their economies. Other countries will also resume economic activity. How long this will take is speculative, but one thing that is certain is that the dramatic drop in price is evidence that the coronavirus has dramatically impacted the global economy, and it is going to take some time for the prices to recover. It is likely that some oil and gas companies will go bankrupt if this downturn in economic activity and oil persist. President Trump announced that the US would open up the strategic oil reserves and ask permission to buy up some of this oil and take advantage of the low prices as well as attempt to stabilize the market. It is likely that oil prices could continue to go down or stay down until the global economy resumes at or near “normal” levels. While it feels good to fill up our tanks for less than $20, it is not always a good thing for the overall health of our economy. 

How Does It Impact Investments?

There are more liquid investments on exchanges that attempt to track the price of oil such as USO, which tracks West Texas oil price, and BNO, which is tied to the Brent Crude oil price. It is important to know that they are investing in futures contracts of the commodity, and are not always able to take advantage of the drastic price swings. They are risky investments and complex in nature because of the rolling over of the monthly futures contracts and there should be significant due diligence done to understand the underlying risks of the investments before they are considered. 

There is a lot that goes into the market for oil and it is certainly a worry about the impact that it will have on the economic recovery. In the 1980’s there was a drastic drop in price and it took 7 years for prices to recover. Understanding the underlying reasons why oil prices fluctuate are important for investors, but it does not mean that you should necessarily take significant actions. 

Where Will The Price of Oil Go From Here?

As it has in the past, prices are likely to stabilize in the future. The economy will open up, and people will get back to work. The future will be determined by the tremendous global economy that has been built and grown on innovation and adaptability and there is no reason to believe that will not be the case this time either. In the meantime, go for a drive (safely and observing social distancing of course) and enjoy these low gasoline prices while they are here!

Jonathon Jordan

 

Disclosure Note: The discussion of oil and ETFs such as BNO and USO are illustrative in nature only. You should check with a trusted professional advisor before implementing any of these investments into your own portfolio. 

 

Where Are We Now In the Markets?

Where Are We Now In the Markets?

As our lives have all been upended due to COVID-19, with an extreme drop in value and subsequent rally in the stock market, many are wondering where we are now. Is it overvalued? Undervalued? Will we test a new bottom?  

The Stock Market is a Leading Indicator

Some may wonder – with death numbers increasing and uncertainty everywhere, why did the stock market go on a huge run the last week? The answer could be multifaceted, but one of the main reasons was because the death toll numbers were being adjusted downwards and the data is pointing towards more optimistic projections of ICU bed usage and critical cases. If we extrapolate that onto the projected “opening” of the economy, it appears that the more extreme measures we have been asked to take in regards to social distancing and staying at home are likely to be relaxed within the next 4-6 weeks. This has led to some positive momentum in the price of stocks.

Valuation of Stocks

If we look at the stock market price to earnings ratio (P/E), we will find that presently it is at about 17.6 (using SPLG as a benchmark). This is slightly above the historical average of 16 or so, but over the last five years, we have been running at a P/E in the low 20s. 

S&P 500 P/E Ratio, Last 5 Years

When either the numerator or denominator gets way out of whack, you can see the P/E spike, having the appearance of overvaluation. This can be a false flag, as seen by this chart showing P/E ratios after the 2008 crash. This event could occur again shortly, as earnings are about to get crushed by the freeze in economic activity. 

Chart of P/E Ratio of S&P 500, Historical

S&P 500 Historical P/E Chart

So what does this mean about valuations and the present stock market? It’s uncertain to be sure. If the virus doggedly hangs on and the policy by the state governors and the Trump administration is one of extreme caution, it is highly likely that the economy will take longer to recover. Another plausible scenario is that the economy gets opened up only to be shut down again after a return of momentum in COVID-19 cases. In either regard (and of course there are many other possibilities), the recent stock market rebound is pricing in a fairly rapid rebound in profits after the likely recession we will have in quarters 2 and 3. If this does not occur, it is very possible that stocks are overvalued at this time and we may see another significant pullback (or two) before recovering.

How Does Governmental Action Through the CARES Act and Federal Reserve Impact Economic Conditions?

What we have seen from the government in this crisis has been absolutely unprecedented. To compare and contrast the 2008 efforts with current action, here is a good article to read. There has been a massive effort to keep Americans on payroll and extend unemployment benefits to workers that previously did not qualify (like “gig” workers or freelancers). Furthermore, direct stimulus payments were sent to Americans that qualified and small businesses were allowed to participate in a variety of loan programs, some of which will offer loan forgiveness. Obviously this will eventually lead to long-term ramifications for our economy, many of which are unknown at this time. At a minimum, we will have incredibly high deficits in 2020 and likely beyond. This may lead to higher interest rates through borrowing costs, as well as increased unemployment insurance premiums for companies, a potential for inflation, and higher tax rates for both individuals and corporations. 

What Does That All Mean and What Should I Do? 

The best analogy I heard recently was that the economy is like a muscle. If you do nothing to your body but sit, your muscles will atrophy. The longer your muscles are allowed to be dormant, the longer it will take to get them back into shape. If allowed to go too long, those muscles may never recover, and even if it is relatively short term, some lasting damage could still be done. While it is likely not responsible for us to just open up the floodgates to accept an increase in virus count, there also will be a balance point where opening the economy to allow for goods and services to be consumed more freely makes sense. 

So….what to do? Continue to look at the data. There’s tons of great sources, including Worldometer, COVID-19.direct, and IHME. Practice social distancing, be safe, and start to make a plan for how you are going to handle your financial and personal life after we are allowed to return to our places of business, coffee shops, and recreational areas. Get out for frequent exercise and fresh air (we just found out that BMI is a significant factor in being hospitalized in coronavirus cases), and enjoy the responsibilities of being a teacher or simply just enjoy being a Zoom meeting happy hour participant. Whether the stock market goes straight up from here or it tests a new bottom, this too shall pass. 

Clint Walkner

Disclosure: The post was written in a rapidly changing environment for the stock market. You should not treat any of this commentary as investment advice. Please work with a professional advisor to discuss your own personal financial situation. Charts were presented as illustrative in nature only. 

 

                 

 

 

 

 

 

 

 

Our Comments on the Recent Market Decline

Our Comments on the Recent Market Decline

As a general rule, we are very cautious in commenting on the normal ebbs and flows of the stock market, as headlines have to be written daily but in our view, many times just add up to collective whims of investors. This, unfortunately, may not be the case before us at this moment.

There was a time in my career when I confidently referred to concerns about subprime mortgages as “much ado about nothing.” But as we all know,  seemingly innocuous items can add up to large ramifications for our economy, and, as a result, the stock market. As we have entered correction territory, defined as a pullback of 10%, it is not unfeasible that we could approach a bear market (losses of 20% or more). We have said in the past that the current bull market is unlikely to end just due to old age, but rather due to something unforeseen happening. A coronavirus pandemic could be “the” unlikely event.  

The measures intended to quarantine off the virus have, and will, cause disruption to the global economy and it could get worse before it gets better. Fortunately, both in the U.S. and globally, we have a good record of containment when prior communicable diseases have been found. Additionally, there are some concerns about the prospects of a less business-friendly political environment as the Democratic nomination process unfolds (which we will discuss at a later date in a podcast and/or blog post).

As the vast majority of our clients are long-term investors, we encourage you to exercise caution in trying to market time out of this. As the quarantine efforts and treatment plans unfold, we will see a leveling out and an eventual decline of the infection rate. Once this happens, the market is highly likely to react positively and the demand for products, services, and trade will rebound. The markets are not experts on pandemics and don’t know how big these disruptions will be, but the old saw “the market hates uncertainty” means that traders and analysts will often try to price the worst case scenario in order to protect themselves. As we simply don’t have enough data to accurately predict what will happen or the duration of this disruption, we encourage patience and perseverance. 

We knew that a correction (and potentially a bear market) was inevitable at some point and for the vast majority of our clients, we have consistently rebalanced toward assets in their portfolios such as bonds that do not follow the stock market and will help in times of decline. We believe strongly in diversification, and these are the times where it can help cushion the blow. However, should you need money in the short term, you should discuss that with us.

Our team at Walkner Condon follows a disciplined investment process, and we intend on rebalancing our portfolios into down markets to position ourselves opportunistically. Our core values dictate that we do what is in your best interest, and we will continue to try and fulfill that for each and every one of you, regardless of market conditions. 

Clint Walkner and the Walkner Condon Team

What Nate and Clint Learned in Orlando

What Nate and Clint Learned in Orlando

This past week, Nate and Clint went to the annual TD Ameritrade conference, called LINC 2020, held in Orlando, FL. The conference features a number of keynote speakers, breakout sessions, one-on-one training opportunities with TD Ameritrade staff, access to various vendors, and demonstrations of new technologies. Here are a few observations we came away with:

 

TD Ameritrade – Schwab Merger

Tom Nally, President of TD Ameritrade Institutional, indicated that the deal between TD Ameritrade and Schwab will close in the second half of 2020. It will operate under the Schwab name. Due to antitrust laws, TD and Schwab are very limited in the discussions they may have prior to the closing of the sale. As a result of this, as well as the sheer volume of data and systems the two companies possess, Tom estimated that it would take 2-3 years for the companies to integrate together. He was definitely hopeful that the new entity would be one of the best financial services companies around when it is finalized.

 

A Changing Geopolitical Landscape 

Ian Bremmer, president and founder of Eurasia Group, spoke at a keynote session regarding his thoughts on the worldwide economic and political environment. He sees an increasing departure from globalization and a significant technological divide between China and the United States. With China set to become the largest economic power, countries will have to decide what sort of technological backbone through 5G they will want to employ – do they prefer to go mostly through the United States or China? Bremmer sees more volatility in the markets and a general global slowdown, though not necessarily a recession imminent in the near horizon. He did not believe that there will ever be a version 2.0 of a trade deal signed with China. He was generally positive on the most recent update to NAFTA, which he pointed out was a good update to prior legislation due to technology improvements that have been made since the original version was signed. Bremmer kept the political prognostications to a minimum but placed President Trump’s chances are getting reelected at 60%. He was most concerned that we wouldn’t have a presidential choice immediately after the election due to the closeness of the race and the risks inherent in our electoral system if one of the parties refuses to accept the outcome. 

Human Connection

Marcus Lemonis is most famous for his CNBC show where he invests in struggling businesses and focuses on “people, product, and process”. He opened his keynote address by disclosing to us that he has social anxiety, an eating disorder, and was molested by a family member as an adopted child. Despite all of this, he persevered to become the CEO of Camping World and a TV star. He encouraged the people he called on to share something that no one knows about them, a deep and dark secret to just him – which of course was seen and heard by literally thousands of people in the room. It was remarkable what people would share after Marcus would gently nudge them into disclosing past trauma in order to show others that many people share the same obstacles in their journey through life. The overwhelming message was encouraging people to connect on a deeper level, and to address their past and learn from it.

 

Technology as a Tool

TD Ameritrade always features an Innovation Lab at their conference, showcasing what a financial advisory office of the future may look like. We viewed a more customized waiting room experience, offering an iPad with curated content for the meeting attendee (we prefer an old fashioned approach – actually speaking with the client and offering coffee!). We also experienced a more interactive financial planning experience, with various flash cards being strategically placed to trigger images on various screens behind the client (this was very cool). This visualization technique was designed to immerse clients more deeply in the financial planning process,  helping them to see their future value as more than merely a graph on the screen. Last, we viewed an advisor workstation desk that could automatically scan documents placed on the glass, highlighted by three large screens and stand-up capability. We also got to sit in an office chair designed by Ferrari. It was very nice, but at a price tag of $10,000, we’ll leave that purchase to the Marcus Lemonis’ of the world.

 

Clint Walkner and Nate Condon

Are You Ready to Lose $200k?

Are You Ready to Lose $200k?

With a tough end to 2018 after a poor December, the 2019 stock market looks to finish up significantly from a year ago. There were many prognostications of the end of the bull market and calls for a recession, but 2019 has brought us solid earnings and a more accommodative Federal Reserve from an interest rate policy perspective. Despite a lack of a solid trade deal with China and impeachment proceedings facing Donald Trump, the stock market has shaken it off and marches forward.

As we generally see market timing as futile, we have to spend some time looking at the reality of the stock market situation: this has been an expansion that has been long in duration in terms of years and also in the lack of meaningful volatility. However, we will, at some point, see the start of the next bear market. If you subscribe to mostly a “buy and hold” strategy in your investments, the cold truth is that the average bear market will take a significant bite out of your assets.

If you have $1 million in invested assets in retirement, a 20% portfolio downturn equals a loss of $200k! While the math here is rather rudimentary, we often notice in meetings that clients rarely consider the actual impact of a bear market on their personal net worth. Consider also that the average bear market is a decline of over 30% and a duration of 13 months (with subsequent recovery taking 22 months, on average). The next bear market will require us all to be patient. A loss, after all, is not actually a loss until you hit the sell button.

We don’t know whether the next bear will visit us in 2020, 2021, or even later…but what can we do about it now? We offer three suggestions:

  • Check the chance of your financial plan succeeding when you stress test it at certain levels.

  • Reassess your risk tolerance levels. If the last time you checked your perception of risk was a number of years ago, it’s a good time to look at it again. 

  • Rebalance your portfolio. If it has been over a year since you brought your portfolio back into balance, you might be taking more risk than you think (since equities now are likely a higher percentage of your overall allocation due to gains).

Note: If you are already a client, we are helping you with all three of the above items on a regular basis, though it is also a good idea to check into your risk perception periodically.

Are you prepared for a down market? If you are questioning whether you are, schedule an appointment and we can help you out (our initial consultation has no cost or obligation). It’s always better to prepare for the rain when it’s sunny outside.

Clint Walkner

The Dane County 2019/2020 Housing Market

The Dane County 2019/2020 Housing Market

While most of us have turned our attention to how is it possible that we had snow on Halloween and trying to determine if this is Wisconsin’s “new normal” for weather, the real estate market in Dane County is seeing few signs of cooling off. Some of the themes of 2018 repeated themselves in 2019 – low mortgage interest rates, tight market inventory, and rising purchase prices. While it is difficult to predict the future in any accurate way, 2020 by be deja vu all over again in the immortal words of the great Yankees catcher, Yogi Berra. 

Most 15 and 30 year fixed mortgages are ranging between 3% – 4%, with favorable terms on some ARM and Jumbo loans as well. The current rate environment is prompting some people to even consider a refinance of their existing home mortgage. The historic mortgage rate averages are significantly higher than what we have seen in the last ten years. As a matter of fact, from the early 1970’s until the mid 2000’s, the average mortgage rate was more than double what we are paying today. With the Fed signaling a more dovish stance on rates, we anticipate seeing below average mortgage rates for the majority of 2020 as well. It is worth your time to speak to multiple lenders, including mortgage brokers who may be able to provide a more tailored experience. 

In our opinion, the strong real estate market is more a product of low inventory than attractive mortgage rates. Both are charging up the market, however, the inventory challenges are creating more froth among buyers. The Dane County housing market, especially over the last 5-8 years, has required that buyers be ready to write an offer when the right house comes along. We strongly encourage potential buyers to meet with their mortgage lender prior to looking at homes and have settled on what is a want versus a need in a home. It is also our recommendation to work with a seasoned real estate agent. With a market that is routinely seeing multiple offers on a single property, you want an experienced agent who truly knows the market. The reality of the situation is that speed and efficiency is required. 

We are happy to provide our thoughts and additional resources should you want to discuss your specific situation further. Feel free to reach out via email to start the conversation. Even though this market is more challenging for buyers in some aspects, it doesn’t need to deter anyone from purchasing a home. 2020 will be a great environment to secure favorable financing and land you the home of your dreams!

Nate Condon