Crude #oil sank below $60 per barrel of the WTI contract. This confirms that the fundamental supply-demand situation was very negative, as I highlighted in recent posts. So, the continued fall in oil prices was to be expected. However, the speed of the crash was a bit of a surprise and created some anxiety among investment commentators.
Should U.S. equity investors be concerned about the crash in crude oil? Not unless you have significant exposure to the Energy sector (examples of sector ETFs include XLE and IYE). Lower oil price is net-positive for the U.S. economy – it means lower energy costs, which results in higher discretionary spending. Consumer spending accounts for about 70% of the U.S. economy. Cheaper oil is positive for expected return for the broad equity market, such as the S&P 500. National average gasoline price at the pump is already $2.7, the lowest since 2010 (see chart), and moving quickly towards $2.50. It’s like getting a tax cut for consumers and most businesses.
However, the effect of this on the Energy sector is far from over, in my view. Tactical investors/managers should monitor their sector exposures carefully. If you’re invested in a core U.S. equity index (e.g., SPY, IVV), your exposure to Energy is likely relatively low – it makes up about 9% of the S&P 500 market value. It’s even lower for the Growth style (e.g., RPG) and for mid-cap (IJH) and small-caps (IJR) indices. However, it’s significantly higher for some value indices, for example it’s 12% for RPV.
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