Market Muhsings

 

 Markets during the month of April were confounding, to say the least. 

 

Probably the biggest news story, in terms of price fluctuations, has been oil. The fact that the world is using considerably less oil now, for the time being, has oil consumption down from the usual 100 million+ barrels per day to somewhere in the 80s, according to this chart from EIA (source)

 

 

 

 

OPEC+’s 10 million bpd cut eases things a little bit, and I would suppose that low prices have many non-OPEC producers also putting out a bit less oil, but it’s still leading to a storage glut, as you can see above, and that’s leading to things like the “negative oil prices” (a negative bid price on a very soon to expire May 2020 WTI contract which people were afraid to be the “bagholder” of; more info on how this happened below). Even as I write this, on April 27th, the June WTI contract is down almost a third its value to a bit over $12 as there are once again fears about where to store the stuff, while oil ETFs and other speculators roll over the June contract a bit earlier before that one too sinks to the negative (update April 30th: seems this rolling over has slowed down and the price is stabilizing).

 

 

Thinking about oil, this is an extreme bizarre world from an historical context, when you think back to the 1970s oil shortages, when OPEC curtailed production to drive up prices and profits and annoy us all (this led to an economic conundrum called “stagflation”—high inflation at the same time as a stagnant economy—which was far more challenging for central banks and governments to manage around than the current situation). President Jimmy Carter addressed the nation to warn of peak oil and that we would run out in 35 years. We all know oil prices ended up crashing in the 1980s, stayed low through the 90s and only in the mid-2000s were we again concerned about prices being too high, or running out (throughout history, the world always seems to have 35 years of oil left). Oil hit $140+ and a smart market prognosticator called for $200 oil. Much of the recession that followed can be attributed to high oil and other commodity prices, as major input costs for production and a large part of consumer fixed expenses put a strain on the economy.

 

 

So, today, we’ve obviously got an economy needing intensive care, and while we know it will recover eventually, there sure isn’t a lot of clarity on how and when. While these low oil prices are an additional blast to one particular sector of the economy and in particular to our corner of the world (Alberta), for the rest of the economy, it’s the medicine they need, as at least it’s keeping costs low for many consumers laid off or temporarily furloughed.

 

Moving on to the other confounding thing: the stock markets. If the economy's in such bad shape, why do they keep going up? Okay, some bounce from the bottom they hit in March was to be expected but at this point in time, the April closing value of the S&P 500 is at the levels of the all-time highs reached in 2018. Back then, an S&P500 over 2900 was an overheated excess, and the markets twice (February 2018 and fall 2018) made big pull-backs from those levels, and at no time were we suffering from a global pandemic and double-digit U.S. unemployment rates.

 

 

Ben Carlson had an excellent post this past month, above, on how the markets haven’t made sense historically and they probably won’t going forward. From a Canadian and more analytical perspective, Ben Felix also recorded a good video on the topic, below:

 

 

Ultimately, the big learning from all of this is, is that the stock markets are forward pricing. The markets don’t dwell on the present, they try to predict the future and largely, in current markets, that all comes down to predictions around how quickly we’ll get over this pandemic and re-open the economy. Data out of Europe seems promising. In the U.S. some states are forging ahead with re-opening, some drug trials look promising. The markets are pricing in a fair bit of optimism, but if things go to crap then we can still see the markets turn around on a dime (and the more it goes up for now, the bigger that crash). Predicting that outcome is impossible and the markets can just as easily surprise to the upside. You don't need to try to predict the markets; as they're already trying to make predictions every hour they're open.

  

Tweets and Articles for April

 

More Stuff

 

Credit Suisse 2020 Global Investment Returns Yearbook CLICK HERE

 

Capital Group's 2020 Outlook CLICK HERE

 

JP Morgan's latest Guide to the Markets CLICK HERE

This 60+ page slideshow is chock full of charts, facts and figures, that give you pretty much everything about everything you could possibly want to know about the economy and markets. Want to know how U.S. stock valuations compare either historically or with the rest of the world? Want to know how much the U.S. government is borrowing? You'll find it all here.

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