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Falling Oil Prices Add to Economic Concerns

 

March 10, 2020

 

So, what just happened?
THE DOW JONES INDUSTRIAL AVERAGE shed more than 2,000 points on Monday in its steepest one-day loss since 2008. The catalyst was a 30% drop in oil prices, stemming from a dispute between Russia and the Organization of Petroleum Exporting Countries (OPEC)—principally Saudi Arabia—over oil production. The stock slide came after markets had already been shaken by more than two weeks of volatility related to the global spread of coronavirus.

 

“The price war comes at the worst possible time, when oil demand is rapidly deteriorating as the virus spreads throughout the world,” says Francisco Blanch, head of Global Commodities and Derivatives Research, BofA Global Research. In response to this latest decline in stock prices, investors continued to flock to bonds, helping to drive interest rates down to just over .5% for 10-year Treasurys.

 

“Saudi Arabia and OPEC have strong incentives to resolve their differences with Russia. We believe oil prices will begin recovering by next year, if not earlier.” — Francisco Blanch, head of Global Commodities and Derivatives Research, BofA Global Research

Here’s our take on what this means.
BofA Global Research analysts recently lowered their outlook for oil prices for the year by 20%,1 and this could have important implications for the broader economy. “Our research has shown that higher oil prices generally have a positive effect on corporate earnings2. Therefore, lower oil prices could translate to lower average earnings growth than what we are currently projecting for companies in the S&P 500,” notes Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research.

 

The oil news, and the stock market sell-off that followed, dimmed hopes that the volatility that has defined markets for more than two weeks will stabilize any time soon, Subramanian says. Still, “Saudi Arabia and OPEC have strong incentives to resolve their differences with Russia,” Blanch notes. “A protracted price war is a very expensive thing for them. We believe oil prices will begin recovering by next year, if not earlier.” And falling oil prices could mean lower gas and energy prices for consumers, who could in turn spend more at places like retailers, supermarkets and drug stores—helping those areas of the economy, Subramanian says. In a broader sense, any positive developments on coronavirus, or signs that the spread is being contained, could lead to a better picture for U.S. earnings and markets in the second half of the year, she adds.

 

“Typically the best days for markets follow the worst days, so panic selling is a path to underperformance.” —Savita Subramanian, head of U.S. Equity & Quantitative Strategy and Global ESG Research for BofA Global Research

What should investors consider doing right now?

While it’s natural to be unsettled by the market volatility, the best advice right now is to avoid making sudden investment decisions, Subramanian says. “Typically the best days for markets follow the worst days, so panic selling is a path to underperformance.” Over the long term, despite the volatility, the outlook for stocks remains favorable, she adds. Stocks of large, high-quality U.S. companies offering dividends may be attractive right now, especially given the low interest rates for bonds. But, notes Subramanian, “it’s always a good idea to talk with your financial advisor about what might make the most sense for your situation.”

1 "Commodity Update: It takes two to supercontango," BofA Global Research, March 8, 2020

 

2 "Too much pessimism for 2019, too little for 2020," BofA Global Research, April 8, 2019

 

Information is as of 03/10/2020

 

Opinions are those of the authors and are subject to change.

 

 

The Chief Investment Office, which provides investment strategies, due diligence, portfolio construction guidance and wealth management solutions for Global Wealth & Investment Management ("GWIM") clients, is part of the Investment Solutions Group (“ISG”) of GWIM, a division of Bank of America Corporation (“BofA Corp.”).

 

BofA Global Research is research produced by BofA Securities, Inc. (“BofAS”) and/or one or more of its affiliates. BofAS is a registered broker-dealer, Member SIPC, and wholly owned subsidiary of Bank of America Corporation.

 

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