We ended 2014 with oil taking a precipitous drop but it appeared to be finding its footing in 2015. The oil and natural gas industry has undergone a revolution of sorts over the past decade. Major technological advances (horizontal drilling and fracking) made energy, that was previously too costly to extract, more cost effective. Thus, the supply of oil continued rising as the energy industry invested heavily in extracting, transporting, refining and storing it.
The U.S. economy continued to grow, albeit at a slow pace, but nonetheless it soldiered on. Europe appeared to be fixing some of its economic issues while China continued to outpace the U.S. and Europe in the growth department. The debates continued regarding when the Federal Reserve would finally raise interest rates. Each time the media reported on the prospect of rates moving higher, the markets seemed to pull back. However, unlike most prior years we started hearing some rumblings of 2015 being a challenging year.
As we began the summer months, the concerns of an oversupply of oil were becoming more apparent as the price of oil began falling again. OPEC (Organization of the Petroleum Exporting Countries) reaffirmed their stance that they would not reduce their production, regardless of how far oil dropped, in an effort to defend their market share from this new technology. Unfortunately, there was another shoe to drop. China, the last major economy that is experiencing growth, is slowing. Energy is a prime ingredient required for growth and it is in abundance. Thus, China’s slowing growth and the over supply of energy fed each other and amplified the downward pressure on the markets. You probably have heard or read that the “world is getting smaller.” This statement is becoming more evident by the day. As China slows, the ripple effects are felt throughout the world.
The year ended with the Federal Reserve hiking interest rates for the first time in nearly a decade. The rising interest rates, coupled with the aforementioned China/Energy conundrum, led to most global markets retreating.
Looking Ahead
I recently heard a very interesting explanation of why we feel more anxiety regarding the future vs. the past. This gentleman explained that most individuals do not feel anxious when thinking about their past struggles. However, when facing difficulties in the present, they experience far greater anxiety concerning their future. Why is that? He suggested that the answer is simply that we know the ending of our past struggles. Thus, because we do not yet know how our current issues will be rectified, we feel anxiety and/or stress. But, what does that have to do with the market and economy?
The ability to prognosticate the future of the economy and/or stock market with a high degree of preciseness
has been proven to be all but impossible. Thus, it is only natural that we feel anxious.
Looking forward, given the issues mentioned, 2016 may seem bleak. However, I would disagree with that view. The answer, as simplistic as it may sound, is that we need growth. This begs the question, “Where will the growth come from?” As we came out of the Great Recession in 2009, the oil and natural gas industry contributed immensely to the growth we experienced. That growth was brought on by the innovation of horizontal drilling and fracking. Interestingly, most of you can probably remember when you were paying $3.50-$4.00 per gallon for gasoline. During that time the cost for oil would skyrocket at the slightest mention of a war or an oil refinery being shut down. Are we still reading and hearing about the possibility of war? What about refineries closing? The answer is yes. Why then has oil continued to tumble? Innovation. Innovation has unequivocally changed the energy industry, but more importantly the global economy.
Thus, I believe in the future because I listen to the past. The past has shown us that innovation continues and that innovation is what propels growth. I do not purport to know exactly what that next innovation will be. However, I firmly believe it is coming, so I will keep my eye fixed on the horizon.
The opinions voiced in this material are for general information only and are not intended to provide specific advice or recommendations for any individual. All performance referenced is historical and is no guarantee of future results.
The economic forecasts set forth in this material may not develop as predicted and there can be no guarantee that strategies promoted will be successful.
