Last week was one of the more volatile ones we have seen from a geopolitical and economic standpoint in quite some time. We saw unrest in Libya and neighbouring nations escalate, which clearly had a profound effect on the price of oil. We also, unfortunately, saw one of the worst earthquakes on record hit Japan at the end of the week, causing widespread panic in the Asian region.
From an economic standpoint, China reported their first deficit in years, Spain had its debt rating downgraded, Japan (before the earthquake) reported poorer GDP numbers and the United States reported a slightly worse than expected weekly jobless number. With all this bad news hitting the wires last week, one would expect a significant drop in the stock market. However, the North American markets again proved their resiliency and did not show much in the way of weakness. The fall in the stock market from its peak was only a few percentage points. In my opinion, it could have been much worse.
I believe the reason the North American stock markets have not fallen as much as many have anticipated is because I, like many other investors and analysts, believe the issues facing the markets are temporary in nature. In my opinion, the unrest in the Middle East will settle down at some point, and when this happens, I believe the approximate $14 per barrel premium that has been built into the price of oil due to fear will be removed, and this will be a positive for the major North American stock markets. Therefore, when there is a pullback in the stock market, investors are embracing this and buying, keeping the markets from tumbling a lot more.
At the beginning of the year I was asked if the price of oil could reach the $100 mark, to which answer was yes, based on my view of a global growth story getting better over time. I have said that oil would get to these levels based on the perception of a world economy gradually recovering. However, I did not envision that oil would reach $100 per barrel as rapidly as it has, and for the reasons it has. Thus, I feel you could eventually see a fall in the price of oil back to the level it was at prior to the geopolitical events in several Arab countries, followed by a steady rise due to the global growth story continuing to improve.
This scenario presents a tricky environment for investors. I think all investors should have some exposure to energy and oil (if your risk tolerance can handle it) even though in the short term you may see some of your energy investments fall if oil were to retreat back into the low $90 range. However, if you own good quality energy investments, they should still be able to reward you for owning them over a longer period of time.
If you have any questions regarding the above article or are looking for an investment adviser to help you with your portfolio, please visit my website at www.investmentadvisorgta.com. I will be glad to speak with you!
Allan Small is an Investment Advisor with Dundee Securities Corporation, a DundeeWealth Inc. Company. This is not an official publication of Dundee Securities and the author is not a Dundee Securities analyst. The views expressed are those of the author alone, and are not necessarily those of Dundee Securities or Metro Canada.