Does Spiking Energy Predict an Economic and Stock Market Crash?

March 4, 2022No Comments


Hello, and welcome to the Smart Money, Dumb Money show. I am your host as usual Keith Richards. I am chief portfolio manager and president of ValueTrend Wealth Management. And today we’re going to talk about the relationship between oil prices and both the economy and the stock market. And it’s really important to understand this relationship, particularly if you are concerned about market volatility going forward, and you don’t want to use one piece of data to draw any conclusions. And this is one piece of data, but I think it’s a fairly convincing piece of data in addition to some of the other things I’ve been talking about recently regarding potential for volatility in the coming year on the market. So let’s get started.

I’m going to go to play from start. Okay. So this is a little bit of a PowerPoint I put together just to give you the insight on how energy and the economy and the stock market are related. So let’s take a look at the pricing of WTIC oil since 1990, and you’ll see whenever there is a sharp rise in prices on WTIC energy, oil I should say, that the market thereafter tends to settle back. And these spikes you can see were in 1990, these, I often call as parabolic spikes. So you see there was a parabolic spike in 1990, there was a parabolic spike in ’99. There was a parabolic spike in 2000, and there’s been a parabolic spike recently. Now each one of these spikes had their own reasons for happening, but the fact is they happened and then they ended.

So I just want you to keep those dates in mind before we get to the next slide, which is the relationship between spikes and energy, like we just saw and GDP, which is a measurement of how the economy’s doing, gross domestic product. So the yellow on this chart is the percentage that oil, WTIC oil, rose in a one year period. So this is not an absolute measurement like a price measurement. This is a percentage measurement. And what you’ll notice is that when you get these one year parabolic moves, because one year is a fairly short period of time in the grand scheme of things. And if you see a massive increase in the price of oil, we want to see what happened to the economy. So you here’s the dates you saw on the price chart, but now we’re seeing one year returns, one year over year returns, 1990, ’99, 2008.

And today, same dates we just looked at. The blue line is the GDP line, which is gross domestic product in the United States of America. Take a look at the relationship. GDP goes down when oil went up, GDP went down when oil went up. It was lagging, but it’s still, there’s a very clear relationship here. Oil went up in 2008, GDP went down lagging, of course. And finally, we are seeing a spike in oil, and we’re starting to see the blue line GDP come down. So this is just food for thought that a rising price in oil can put the kibosh to our economy. One of the reasons is because oil is a very big factor when we measure inflation. Did you know, and this is a Seeking Alpha article I read recently by an economist, so this is not my insight, this is some research I did, but I was interested to know that oil, when it rises by approximately $10 a barrel, it causes an increase in CPI, consumer price index inflation, by 0.4 to 0.5%.

So for every $10 we see oil rise, we see a rise in inflation by almost half a percent. So that’s interesting because that by itself can cause the economy to contract when prices get too high, people can’t afford stuff. Less stuff was bought, manufacturers slow down because less things are being made. And it’s a vicious circle. So I’ll get to that in a minute, but I do want to now look at how the stock market acted when we saw those spikes in oil. So remember there was a spike of oil in 1990. Now the market actually crashed in 87, but oil had been moving up into that spike in 1990. So we did get a correction then, I remember that correction, October of 1987, very well because it was really my first day on the job in a financial industry-related business. I worked for Dunn & Bradstreet in credit and collections analysis.

And it was my very first day of the job. It was black Monday and, you know, market’s crashing and you know, what a way to start in the industry. So that’s been kind of riveted in my head and oil had been rising and inflation was a factor back in 1990 as I remember. So the next spikes in oil we saw were in 2000 and 2008. And we see that the stock market rolled over shortly after these spikes in oil. So there seems to be some relationship between oil and the economy and the stock market. And here we are right now, we’ve just seen a big spike in oil, as you saw on the last chart year over year spike. And of course the stock market is a little spikey looking itself. Isn’t it? So the question is, I have a couple question marks there, what could happen and we have to draw our own conclusions.

So just a few factors that I put together on a little slide here, which is that remember a $10 increase in oil is about half a percent increase in inflation. And that’s really inflation is bad for the economy. One of the reasons that oil is increasing there’s the supply chain problem. There’s the COVID problem that came from that, that drove that I should say, but there’s also what I’m gonna call green idealism. And I won’t rant too much, but I’ll just make it perfectly clear that the timing by President Biden and Prime Minister Justin Trudo in trying to appease potential green voters, and it really was all about buying the vote. Trying to appease this, for lack of better words, woke culture of saving the world all in one year by capping exploration and halting pipelines and adding carbon taxes in Canada to reduce consumption of oil could not have been timed worse.

And either these people are unbelievably ignorant and crazy, which is a very viable potential, or they just didn’t care because the signs. I mean, I’m not an economist, I’m not the prime minister or president of a large nation, but I knew back in 2020, and you can go back to my blogs, you can go back to my videos. And I was talking about inflation is coming because COVID is going to slow things down. And I told everybody on this video and on my blogs buy oil. And if you’ve been watching my videos and reading my blogs for a while, you know I said that and you know I was right because oil was 40 bucks at the time. Okay. If a guy like me sitting in an office, Barrie, Ontario can figure out that COVID was going to be inflational and oil was going to go up and there was gonna be a supply constraint, why can’t the President of the United States and the Prime Minister of Canada figure this out? Either they’re crazy or there’s an ulterior motive. Buy the votes. Who cares what happens. And I think one of those two factors are the reason why these ridiculous policies right at the cusp of an obvious inflation spike happened. End of rant. Wage, supply, wage and supply inflation. These are part of the inflation problem.

 

When wages go up, this is the single biggest expense to most businesses, my own, sorry, I’m getting passionate. I just flipped my camera, my own business included. My wage costs are bigger than any other expense that I have at ValueTrend Wealth Management. So if you increase wages, I can tell you this. It’s pretty hard for any boss to roll back those wages later. So it’s a permanent sticky type of inflation. Next point, historically, as we just saw, spikes in oil indicate a market and an economy ripe for a potential contraction. We saw that. It doesn’t mean it will happen, but history shows us there’s some relationship there. So normally a contraction is countered by fiscal and monetary tools. We know that. Problem is that a number of these tools have already been used to their full extent, one might argue. So I think that the Fed has a real problem on their hands.

 

They have already stimulated things. So if we go into a recession, I mean, they can raise rates now that people can’t afford anything to begin with and then the rates go up. I think this is not going to help the economy and they can spend money, but there’s so many trillions and trillions and trillions of dollars of debt that it just kind of gets ridiculous how much more they could actually spend. And of course printing money is inflationary. So it’s really a pickle that these people have put themselves into. And again, my contention would be that if oil producing countries like Canada in particular, had just been allowed to produce their oil without worrying about appeasing, you know, newly inspired teenagers who are finally allowed to vote for idealisms without understanding the mathematics. If we had not done these improper caps and whatnot on production here in Canada and in the United States, then we would be in less of a pickle as far as inflation goes.

But now here we are. And the tools, unfortunately, that the Fed have in front of them, I think, are going to be limited this time around. So it’s just food for thought that that relationship between oil and market corrections may in fact prove to be true this time around again. So that really is probably the last thing I’m going to talk about regarding the relationship of oil. One final thing I want to talk about is how active investing in this kind of environment. So if you believe that the market is no longer the great and wonderful easy bull market that any fool could make money in. And a lot of fools have made money in the market over the past few years. So if you believe that this is gonna be a tougher environment, then you have to learn to rotate.

And I teach this stuff through my blogs and I teach it through that technical analysis course that I recently put together, but I actually do it. Craig and I run a number of platforms at ValueTrend. And the reason we post our results, which are just going, the results for February are just going to press in the next day or so. So by the time you see this video you should be able to see our results, but here’s a sneak preview. And what I am showing you here is the VTAG is our aggressive platform. The VTEP is our just regular equity platform. It’s more conservative. The income platform is here and then here’s the S&P and the TSX returns. And I wanna just go right to the year-to-date, because you could look at each column and they all say the same message.

Well one month our aggressive platform made 7%. The equity platform made 5%. Now this is before fees, but over one month our fees are not much. It would be about 0.15 percent or something like that. So you can subtract that if you want. But you can see that we handle the outperforming the market, our income platform lost a little bit, but we handle the outperforming the market. The S&P went down 3 and the TSX barely broke even. And where we were making, you know, considerably more than that. Year to date from January, you can see that our aggressive platform made about 7.8. Again, takeoff the fees you’re probably down closer to seven and a half. Our equity platform made 5, income managed to squeeze out 0.2%, but more importantly, the S&P lost 8%.

That’s a long way from making almost 8% for our VTAGs, we are making 5% for our equity platform and the TSX lost about half a percent. So even after fees, we are so vastly ahead of the markets over this very volatile period, I think both, it pays some tribute to our management style that we do a good job. And we’ve always said, in fact, if you look at the headline of ValueTrend, it says “Limit Your Risk. Keep Your Money.” We’re really good during bear markets. We actually have had our very best years, including 2008, I might add, that 2008, 2009 was probably the single best period I ever had as an investor. And it was a single worst period of time for most portfolio managers. But for us, it was very good because we follow a rotational and a market timing approach.

And so even if you choose not to deal with us, following a strategy like I present in the technical analysis course will help you achieve, if not exactly the same level of success that we’ve had, but a good level of success. And it’s like, I always say any fool can make money in a bull market. So don’t feel proud if you’ve made money in the past couple of years. It’s are you making money now? How have you done since the beginning of this year, when the market started getting really sour? If you’ve done as well as us then you are on track. If you have not done as well as us and you don’t think you will do as well as us, then it’s time to give us a call because this is what we do. We’re really good in lousy markets to summarize it.

So again, not that I like this video to be an infomercial for ValueTrend, but I am feeling very strongly right now that things are not quite the way they used to be. And investors are gonna have to change to and adapt to a new reality. And I do hope that you are doing so either through some of the teachings that I offer and reading my blog and whatnot, or by coming to see ValueTrend and asking us to look at your portfolio because it isn’t an easy street any more folks. This is going to be a hard market. But interestingly, as you just saw on the ValueTrend results, in a down tape you can still make money if you follow a strategy. Thank you very much for watching and we’ll see you again next week.

 

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