We know, we know, you don’t want to hear about oil. No one seems interested in the all-important commodity at the moment, but that is exactly why you might want to pay attention. Oil stocks have had a terrible decade—down 10% while the S&P 500 rose almost 300%, hence the derision they face from investors. Prices are so low that oil now composes just 4.5% of the S&P 500, very near to the lowest ever (in 1999). The big question investors need to be asking themselves is “is this peak pessimism”?
FINSUM: We think oil stocks offer some value right now, but what will be the catalyst to make them rise? A big economic boom seems unlikely at present. Oil missed this cycle and it is still oversupplied. We would stay away.
Oil prices are going to get some support as OPEC is planning to cut its output. That won’t be welcome news to those at the pump this summer, but it is good for the oil industry. Within the cuts, there will be winners and losers. One big worry is that the cuts won’t even work because there is still too much production from the US and because the primary fears are on the demand side, not the production side. The key is to buy oil stocks that can thrive in a low price environment and deliver improving returns to investors. These include EOG Resources, Suncor, Pioneer Natural Resources, NRG Energy, and Delek.
FINSUM: Oil stocks are deeply out of favor right now, so this is quite a contrarian call, but given the catalyst of OPEC cut they may be a solid bet.
Gold just took the jobs report on the chin. As our readers will know, the US jobs report from Friday was nothing short of stellar, with the job creation numbers blowing away all expectations, and in doing so, lowering the odds and potential pace of Fed rate cuts. That led to a big sell-off in gold on Friday that followed an even larger one Monday. Gold lost almost 4% over just two days last week.
FINSUM: The jobs report simultaneously sapped gold of the fear boost it gets from worries about the economy, as well as the potential benefit of lower rates.
Something very interesting is happening across commodities markets—they are rallying. The reason this is interesting is it is a broad-based rally, not just in a narrow safe haven like gold. Oil, a major barometer for growth, is also jumping. The reasons why are two-part. Firstly, the US and China seemed to ease trade tensions somewhat this week at the G20; but secondly, OPEC has said it is cutting oil output. Metals, grains, and emerging markets also rallied.
FINSUM: This makes sense because a de-escalation of the trade war would help the global economy. Further, a reduction in tariffs would simply make the flow of commodities and goods smoother once again.
Gold has been doing well recently. Between global trade turmoil, a falling economy, and decreasing yields, the metal has thrived. Here are three reasons the gains won’t reverse. The first is that the stock market continues to look risky, meaning gold’s allure as a safe haven seems assured. Secondly, yields on bonds have a definitively downward direction, which makes gold more attractive. Finally, inflation is unlikely to stay low forever. When it starts to rise, it would give investors another reason to bet on gold instead of bonds.
FINSUM: We don’t really think inflation will be much of a factor for gold in the immediate term, but the first two points are material.