Time to Protect Your Stock Portfolio

Time to Protect Your Stock Portfolio

Printer-friendly version
a a
Type Size: Small

Employers added 192,000 jobs in the U.S. last month, which helped the unemployment rate fall to 8.9 percent.  However, average hourly earnings were $22.87, just a penny higher than the month prior and the market price of crude oil keeps moving higher. According to the AAA Daily Fuel Gauge Report, the current national average price for gasoline is $3.47 per gallon, up from $3.11 a month ago.  If your car has an 18 gallon gas tank, the cost of filling up has jumped from $55.98 to $62.46.
The jump from a $50 handle to a $60 handle on a tank of gasoline is a direct financial and an indirect psychological impediment to consumer spending.  This is serious as consumption accounts for around 70 percent of GDP.
Food prices are also much higher, one of the major causes of recent strife in the Middle East.  In the Middle East, the consumer tends to purchase food that is much closer to the unprocessed commodity, whose price can fluctuate wildly. In the U.S., the psychological impact of rising food commodity prices tends to be smaller, as much of the food we consume is processed.  Much of the increase in costs is absorbed by the processor.  But prices are still rising.

Unless energy prices pull back significantly soon, expect consumers to tighten their purse strings.  This will hit the revenue line for corporations, which increasingly face tighter profit margins and lower earnings as input as well as energy costs rise.
Over the next three months, at current commodity price levels, you can expect corporations to warn about lower-than-expected profits as they announce first quarter earnings and forecast second quarter earnings. Stock prices are likely to fall as a result.

For now, stocks remain close to their two-and-a-half year highs.  Companies in the S&P 500 are trading at about 14 times projected per-share earnings for the next 12 months; if companies and analysts revise their profit forecasts lower, that valuation could jump significantly, giving investors a reason to sell.  Even after stock prices declined Friday, the VIX—a measure of fear in the stock markets—is close to its lows. All these measures suggest complacency in the equity markets, which means the risks may not be priced in properly.  The last time oil prices were on an upward trajectory like what we are currently witnessing was the end of 2007 and the first half of 2008.  According to the National Bureau of Economic Research, this was when the U.S. economy fell into recession.

These concerns will likely be small potatoes in the long run. In October 2008, in the depths of the financial crisis, Warren Buffett reminded us that, “In the 20th century, the United States endured two world wars and other traumatic and expensive military conflicts; the Depression; a dozen or so recessions and financial panics; oil shocks; a flu epidemic; and the resignation of a disgraced president. Yet the Dow rose from 66 to 11497.”). 

Still, it could pay to be cautious.