JWM Q2 Market Commentary: “Oil’s Slow Recovery and the Upcoming U.S. Election”

9 April, 2016

2016 began with a rough start in the equity markets. Continued decline in oil prices and concerns over instability in the Chinese stock markets drove global markets near correction territory, which is usually thought of to be a decline of 10% or more

2016 began with a rough start in the equity markets. Continued decline in oil prices and concerns over instability in the Chinese stock markets drove global markets near correction territory, which is usually thought of to be a decline of 10% or more. The markets have since stabilized and recovered some of those losses, though many are still down on the year or near flat. 

Since dropping to $26/barrel, Brent crude oil has ‘recovered’ to the $35-$40 range, and this seems to have reduced some of the market volatility. When it comes to oil prices, we still stand by our main premise that, as long as global marginal production costs of oil are almost double that of the current price, the fundamentals of supply and demand will eventually win out, and prices will rise again. 

As reported at the beginning of 2016 by Knoema, “Oil prices of $55-$60/barrel exceed the costs of Russian arctic oil production, Europe and Brazil biofuels production, shale and tight oil product in US and Canada and offshore oil extraction in Brazil.” These producers can only survive at current prices for so long before some companies fail or shut down certain wells, global supply dwindles, demand increases, and prices rise. We hope this current recovery signifies the $26/barrel mark as the bottom of the oil bear market, but only time will tell. 

Down south of the Canadian border, our close neighbours are in an election year. This election cycle has garnered even more headlines than usual, with a diverse array of atypical political candidates that have received far more support than anyone would have guessed a year ago. The most likely republican candidate, Donald Trump, has no political experience whatsoever. Nor has Dr. Ben Carson, who for a while was Trump’s only rival in the republican national polls, or Carly Fiorina, who was best known for her role as the CEO of Hewlett Packard. 

It seems the American public is hungry for something different than the usual, established politicians, who look and play the same part as many of their predecessors. While this election certainly carries a different tone, a similar question will be asked: how much will the uncertainty around this election cycle affect the stock markets? Will candidate A have a negative/positive effect? 

These are valid questions, but even as the ‘leader of the free world,’ this is still a democracy; just ask Barack Obama how easy it was to bring sweeping changes through the senate. For better or worse, the U.S. political system is more conducive to slow, incremental change than it is for dramatic shifts in policy. 

This doesn’t mean that the election itself won’t bring uncertainty in the markets, but history shows us it really doesn’t have all that much of an impact. “Presidential election years generally have coincided with favorable markets, particularly when the incumbent party wins,” says T. Rowe Price. Some economists will tell you that markets perform better in years where a democrat is elected. Others will tell you a new republican president is a good thing for the stock market. If a century or more of presidential elections hasn’t provided a definitive answer as to what to expect this time around, it’s most likely that stock market performance and election cycles really don’t have much of a correlation at all. 

The market is driven by the fundamentals of the corporations they consist of and the underlying economic realities these companies rely on to fuel their continued growth. The process of finding out who the next face in the White House will be isn’t going to drastically alter that course overnight.