…Inflation… Our inflationary pressures scorecard suggests that price pressures are moderating The rapid decline in petroleum costs across the globe has helped moderate U.S. inflation pressures. Our outlook is for inflation to remain tepid.
…The Fed… In its December policy statement, the Federal Reserves FOMC dropped the phrase “for a considerable time” regarding how long it may maintain short-term lending rates near zero beyond the end of QE. Instead, it said it could “be patient” in taking steps to raise borrowing costs, injecting greater uncertainty into the rate outlook.
…Washington… The sharp drop in oil prices may lead to a revision of a long-standing U.S. policy of banning exports of domestic crude oil. It is possible that proposals to end the ban will gain some traction if abundant oil supplies and low prices persist, making the policy seem unnecessary.
…Borrowing… The recent drop in energy prices, particularly gasoline and other motor fuels, has given a boost to Americans’ budgets and may help extend a declining trend in borrower delinquency rates.
…Investing Commodities: World crude prices fell to near or below production costs for recently developed wells in some shale fields and may lead to curtailed production as the economics change. The loss of those supplies could help the market stabilize and prod prices higher. However, weak demand in much of Europe and Japan could moderate these influences.
Fixed Income: Two areas of the fixed-income market that may be affected by the rapid decline in oil prices are emerging markets and high-yield bonds as these segments have outsized exposure to oil and gas companies as compared with developed markets and investment-grade bonds, respectively.
U.S. Equity: Historically, producers of discretionary goods and services for consumers gain when oil prices weaken, yet this relationship hasn’t held true in recent years. Instead, the S&P 500 Consumer Discretionary stock price index has moved roughly in tandem with crude prices in the past three years, underperforming the broader market by about 5 percent in 2014. We expect this relationship to resume as the two previous periods when the relationship broke down were brief.
Global Equity: Internationally, nations that are net petroleum exporters, including Russia and Mexico, may suffer detrimental effects from a prolonged slump in prices. But for much of the world, lower fuel costs can be an economic stimulant, as most rely on imported supplies. The exposures to crude oil exporters are relatively small for two common global index funds and are therefore more likely to benefit from falling crude oil prices.