If you have filled up your gas tank lately, you already know the good news. Due to the drop in oil prices, gasoline has gone down to
levels we haven’t seen in several years.
The bad news is that the drop in the price of oil is having negative effects on oil companies and many of their suppliers. It is also having a negative effect on oil producing countries like Russia, which is seeing a collapse of their currency, the ruble, because their economy is heavily based on the price of oil. Some people are nervous that this could lead to further problems with the rest of the world.
The issue is that there is a huge supply of new found oil coming in from the U.S. due to fracking. At the same time, much of the European economy (and many other places in the world) have slowed down. There is not enough worldwide demand for oil to sop up all the excess supply that is coming to market.
It is really a classic supply versus demand problem. As long as the supply severely outstrips demand, the price will go down. Normally when the demand for oil goes down, the supply also goes down to meet demand. Then once it hits an equilibrium level, it will cease its downward move. But that’s the problem. Countries like Saudi Arabia and other oil producing nations are not curtailing their production. They are, in effect, declaring war on the fracking companies here in the U.S. It appears their plan is to get the price of oil so low that many of the fracking companies will cease operations or go broke because at some price of oil, the fracking companies cannot operate profitably. Oil producers like Saudi Arabia are betting they can last longer at lower oil prices.
As usual, it is the collateral damage to economies and companies that is worrying the market in the near term.
The other worry is the high yield market. Many of the high yield bonds that were purchased came from oil companies. If those companies can’t pay their debt, then the bonds could default. Some worry that the potential high yield bond problem could spill over into the stock market.
We think those are all legitimate concerns.
In the long term, however, lower oil prices are terrific for consumers. If you can save $10 to $20 per week on filling up your gas tank, that puts an extra $520 to $1,040 dollars in your pocket per year to spend on other things. Multiply that by the many millions of drivers there are in the U.S. and billions of drivers worldwide and that adds up to a lot of stimulus. It’s the same thing as giving consumers a giant tax cut. And that is good for the economy. Plus, the cost to heat your home should decrease and as transportation costs go down, the price of many things can go down with it. Oil is used in many products, so those prices might fall too. So the consumer is getting a real gift.
In the near term, the markets are going to be a little shaky as people try to figure out what the total damage is going to be in the oil patch and beyond. Could we finally have that 10% – 20% correction that we have avoided for the last 5 years? We’re not predicting that, but anything is possible. We might be in for a little pain. For those with a longer time frame, however, the lower cost of oil is a real positive for the economy. So if we do get one of those corrections, look for companies to buy on the cheap.
Ok, this is probably not news to anyone who has children, but it is darn expensive to rear them. The U.S. Department of Agriculture recently released the actual facts and figures in its “Expenditures on Children by Families, 2013” report.
How does $245,340 sound to you? That’s what it costs to raise one child. And that’s only up to the age of 18, so it does not include the cost of college and beyond.
That’s right. The report shows that a middle income family with a child born in 2013 can expect to spend about $245,340 ($304,480 adjusted for projected inflation of 2.04%) for food, housing, childcare and education, and other child rearing expenses up to age 18.
The report also indicates that the income of the parents is a defining factor in how much the child will cost. The more money the parents have the more it costs to rear the child and vice versa. Also, the area of the U.S in which you live also matters. People in the Northeast pay the most, with the West coming in second. But no matter what the income of the parents, it’s still a staggering number.
Here is a link to the report and you can see for yourself all the nuances as to how the USDA accounts for the numbers
By the way, the reports says once you have more than two children, the less it costs PER CHILD due to things such as hand me downs, sharing of toys, the purchasing of food in larger more economical ways etc., but the total cost is still more with additional children.
This report only confirms that if you are going to have children, you should prepare for the costs and start saving as early as possible.
This is especially true if you aspire to pay for your children’s college school expenditures. According to CNN Money, the cost of in state tuition at a public school such as the University of California (Berkeley) is $12,864. The total annual cost is $32,479 which includes tuition, fees, room and board and books (excluding grants or scholarships).
Tuition at a private school such as USC is around $46,298 per year (according to CNN Money), with the total cost PER YEAR of approximately $63,033.
So getting started with a 529 plan or some other savings vehicle the year in which the child is born would make a lot of sense.
The markets have returned to volatility lately. Every time the market looks like it’s headed down, we see people on TV start predicting that this is the start of a down market.
So here is how we see things right now.
First, the stock market has not had a big correction for a long time, so we all know that at some point it will correct. There are a lot of global events going on that are causing angst in the markets. Russia and Ukraine is probably the greatest of these issues, but certainly not the only issue. Israel and Hamas, Isis, Iran, Italy sinking into a recession and more are all adding to investors’ fears.
On the other hand, earnings reports have been generally pretty good. On Monday morning, August 5th, Bob Pisani of CNBC reported that of the 76% of the S&P 500 companies that have reported so far for the quarter, on average, earnings are up by about 9.7% and revenues up about 5%. Those are actually fairly decent numbers.
The bears (those who believe the market is going to go down) believe the companies’ earnings are going to slow down. The bulls (those who believe the market is going to go up) say the companies’ earnings are strong, the interest rates are still low, so stocks are the place to be.
The bears say that rising interest rates will be a competitor to dividend paying stocks so stocks will get sold off. The bulls say that if interest rates go up, then bonds will go down in price, so you want to remain in stocks.
So the pessimists and the optimists are both trying to figure out where the market should be, hence the volatility. For the year, the stock market has been hovering around the flat line, with some months good and some months bad. So there has not been a real direction one way or the other.
We have heard several prognosticators say it looks like we are heading for a growth rate of about 3% to 4% in the U.S. for the year. If that growth rate is accurate, that is normally not the underpinning of a major bear market. But that does not mean there can’t be corrections along the way.
As we have said many times, no one knows with certainty where the market is going to go. We certainly don’t know if the bulls or the bears are going to be right in the short term. So we say that now is a good time to look at your portfolio, make sure you are in the proper asset allocation, and then be sure it is something that will not cause you to panic if the market goes down by 15 or 20% (which is a normal market correction). As most of our clients have heard us say, it is panicking out of the market at the bottom that causes the most damage to investors’ returns.
If you are not sure of where you are or just want to review your account, please call us. We are always here for you.
This quarter we are focusing on behavioral investing. Each quarter as we focus on a different topic, we will provide you information and opportunities for further discussions.Please check out this ShaveMagazine.com article.
