As the Fed prepares to raise rates for the first time since 2007, the corporate high yield debt market, aka the junk bond market, is in serious crisis mode. The talking heads on TV say that everything is fine if you exclude energy but this is eerily similar to them saying that the S&P is fine excluding financials in 2007.
Black Swan Watch: The Oil Bubble Bursts
Major bear markets are typically caused by sharply rising interest rates, declines in corporate profits, gross overvaluation and severe recessions. The Runnymede team is always diligently and systematically monitoring the standings of these critical variables.
The most challenging factors which we spend time thinking about and analyzing are “”Black Swan”” events. These rare and unpredictable events cause severe damage because of psychological biases that make people individually and collectively blind. One potential black swan in our sights is the US shale oil bubble bursting. This has appeared on our radar screens because of the crude oil crash over the last half year which has seen prices of crude oil fall from $107/barrel to just $46/barrel today. Needless to say, this is a large deviation which has laid witness to a 57% decline in the price of oil. So what are the possible implications for the US economy and the stock market?
The Winners and Losers of Falling Oil Prices
Since June, oil has been on a sharp decline from $107/barrel to $67/barrel. Thanks to slowing global growth and OPECs reluctance to cut supply, oil prices have fallen to their lowest levels since 2009. As a consumer it is wonderful to see gas prices around $2.50 again. It's been a long time coming. You often read that consumer stocks are the big beneficiaries of falling oil prices but is this truly the case? Let's take a quick look at the potential winners and losers of falling oil prices…