Oil's Decline: What's It Mean For Investors?
Crude oil has suffered a surprisingly big drop in a relatively short amount of time.
As Bloomberg recently reported, oil has fallen more than 13 percent since the beginning of July. This represents the commodity's biggest quarterly decline in more than two years.
It might come as a surprise to investors, because rising geopolitical tensions across the Middle East and Eastern Europe would normally result in higher oil prices.
However, ample supplies are more than offsetting these risks. Lower demand for oil from Europe as well as in key emerging markets such as China have dealt an additional blow to prices.
What could the decline mean for equity investors?
Who Could Lose
It goes without saying: Major oil companies could suffer from any prolonged downturn in oil prices. This has already been felt in the declining market capitalizations of global super-majors like Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX). Both stocks have suffered declines of more than 10 percent off their 52-week highs this year.
While earnings are still expected to be resilient -- super-majors hold integrated business models with diversified operations across upstream and downstream assets -- their valuation multiples are compressing based on lower growth expectations.
Who Could Win
There's an opposing side to every trade, though.
While declining oil prices are dangerous for the energy sector, they’re a boon for companies that rely on the health of the consumer. More specifically, companies in the consumer discretionary and retail industries should benefit.
That’s because when oil prices fall, consumers have more cash in their pockets. Since the United States is an economy dependent on consumer spending, it’s very likely Americans will spend that extra disposable income.
Both companies were already reporting growth even before oil began its decline, which means growth should accelerate toward the end of the year. For example, earnings per share at Macy’s increased 11 percent last quarter. The Gap, meanwhile, reported 17 percent growth in earnings per share last quarter.
It’s possible profits will come in stronger than expected in the current quarter, which could stimulate a rally on earnings.
Oil’s sudden decline over the past quarter is obviously a bad sign for energy companies, but the flip side is: Consumer spending should theoretically increase in the coming months.
That’s a great sign for retailers like Macy’s and The Gap that benefit from fiscally healthy U.S. consumers.
Disclosure: At the time of this writing, the author had no position in the equities mentioned in this report.
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