On Monday morning, an unexpected headline in addition to coronavirus pushed stocks lower and fueled record low Treasury yields. OPEC’s alliance collapsed after last week’s meeting ended with no agreement on an oil production cut. Over the weekend, Saudi Arabia announced that it plans to increase oil production in April and is offering unprecedented discounts to increase its market share. The strategy is most likely an attempt to impose maximum pain in an effort to bring Russia and others back to the negotiating table. However, the action created an unexpected price war between OPEC members as Russia stated that it can withstand these price levels for several years. The consequence was a hit to energy stocks as oil is back near the early 2016 lows when oil was below $30 a barrel.
While lower energy prices will benefit U.S. consumers and the economy over the long run, many energy companies are already suffering due to lack of demand or profitability issues. The rapid price decline is likely to feed into recent credit concerns surrounding the coronavirus outbreak. The concern is that the price decline could eventually lead to an increase in debt defaults. However, the energy sector is currently only 3% of the S&P 500, down from 10% in 2014. While the 2015-2016 price drop dragged on U.S. GDP and earnings, the damage to the energy sector did not take the U.S. into a recession.
Although China reported no new coronavirus cases outside of Hubei for a second straight day and South Korea said the outbreak is showing signs of slowing, the markets are fiercely focused on the current spread in Iran, Italy, and the U.S. The OPEC oil headline amplified concerns around the uncertainty of the economic impact. On the other hand, as yields decline bonds continue to provide protection and liquidity to portfolios while stocks look for clarity. We expect volatility to remain high in the short-term, but we believe our diversified approach will dampen the short-term impact of the stock correction, and that stocks will eventually rebound in anticipation of an improving economy. If you would like to discuss further, please contact a member of your service team.
Disclosures: The information reflects Homrich Berg’s views, opinions and analyses as of March 9, 2020. The information is provided for informational purposes only and does not constitute an offer to sell or a solicitation of an offer to buy any investment product. The information does not represent legal, tax, accounting or investment advice; recipients should consult their respective advisors regarding such matters. Certain of the information herein is based on third party sources believed to be reliable but which have not been independently verified. Past performance is not a guarantee or indicator of future results; inherent in any investment is the risk of loss.