Swings and Roundabouts Feb 2015

The mood at the end of January turned somewhat sour as analysts and commentators reacted badly to disappointing earnings news. Disappointing fourth quarter 2014 earnings from major companies like Microsoft, Proctor & Gamble and Caterpillar triggered a sell-off in the markets. Analysts noted that the decline was not only because earning results were soft for many industry leaders, but also because overall indications for the rest of the year were not as rosy as once projected. Consequences from global events and issues that surfaced in the last half of 2014 had not been fully factored in analysts’ expectations. Falling oil prices certainly play a role in forcing down stock prices in the energy sector, but there are further factors – both positive and negative – involved in the stock market’s overall performance.

Here are some of these factors:

• The decline in oil prices
  In time, the benefits that businesses and consumers accrue from falling oil prices could boost consumer spending and lift sales of durable goods and other high ticket items, but as January came to a close, the news spotlight was on lackluster performances from companies serving the oil exploration segment. Caterpillar’s CEO noted that the decline in oil prices was the most significant reason for the company’s decline in revenue in the fourth quarter of 2014. Falling oil prices are bad news for construction equipment manufacturers and commercial transportation companies with big customers in the world’s oil patches. Of course, companies that need oil products to make goods or provide services are reaping the benefits. American Airlines has seen the 17 percent decline in fuel costs give a welcome boost to their bottom line and a retreat from red ink into the black again. Consumers, too, pay less for gas, have more discretionary income, and are likely to project this into improved consumer confidence.

• A stronger U.S. dollar is a double-edged sword
  U.S.-based companies that rely heavily on overseas sales and revenue have seen their numbers decline because foreign earnings aren’t worth as much as they used to be. With their respective currencies devalued against the robust dollar, many countries are seeing their economies shrink. Less global growth is bad news for many U.S. companies. They need expanding world markets to generate increased sales and earnings growth. When global growth slows down, international companies like Proctor & Gamble – one of the corporate giants that posted lower earnings for the fourth quarter – see their revenues and profits decline. Other notable companies caught in this bind include DuPont and Caterpillar. Although Caterpillar has blamed its disappointing earnings squarely on falling oil prices, the company also was hit by currency swings.

• Good news for home buyers
  Propelled by the same tailwinds that have strengthened the U.S. dollar, long-term interest rates have dropped, giving a boost to home buyers. The housing market continues to log steady growth, which is always a positive for economic growth.

How will all this balance out? Will lower oil prices ultimately prove beneficial for overall economic growth and stock prices in the United States, or will decreased oil exploration put the brakes on economic expansion? The answer is not yet clear, but many analysts believe that the positive aspects will outweigh the negative – although most don’t expect clarity for several months.

The above commentary is general in nature and is not intended to replace the advice of your tax and investment professionals.

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