Oil prices moved higher, according to The Wall Street Journal, after the U.S. Energy Information Administration reported crude-oil inventories fell unexpectedly last year. Analysts had predicted oil supplies would rise.
One expert cited by The Wall Street Journal suggested the stockpile decline and subsequent oil price rally owed much to Gulf Coast refiners reducing inventories "to mitigate state ad valorem taxes on year-end crude stocks." If that's the case, the oil price increase may not be sustained.
Regardless, improving oil prices gave U.S. stock markets a boost. In particular, the Standard & Poor's 500 Index (S&P 500) benefited from improving performance in the energy sector:
"Of 80 U.S. listed oil and gas producers, all but one -- a bankrupt company -- rose on the day, with nearly half of the companies up more than 10 percent. Energy shares were the biggest gainers Wednesday in the S&P 500, up 3.8 percent and helped the S&P 500 on the whole gain 1.2 percent in late-afternoon trading."
Barron's reported energy stocks had gained 5 percent for the week, but were still off by about 22 percent for the year.
The Organization of the Petroleum Exporting Countries (OPEC) released its World Oil Outlook last week. BBC reported OPEC anticipates oil prices will begin to rise in 2016, although its producers' share of the market is expected to shrink by 2020 as rival oil-producers proved to be more resilient in the face of low oil prices than had been expected.
LOOKING BACK... Each week, 'The Economist Explains' blog expounds on subjects ranging from current events to economics, from philosophical or scientific issues to everyday oddities. Let's take a quick look at a few of its headlines during 2015:
- Why the Swiss unpegged the Swiss franc (January 18, 2015). Remember when the Swiss National Bank removed its currency peg last January? The Swiss franc realized double-digit gains in value and the Swiss stock market dropped.
- Everything you want to know about falling oil prices (March 18, 2015). "The main reason for falling prices is increased supply from America thanks to its fracking boom, which has reduced its demand for oil imports. Other countries, notably Saudi Arabia, have been loth to curb supply lest they lose their share of the global oil market."
- Why so many Dutch people work part time (May 11, 2015). More than one-half of the working population in Netherlands is employed part-time --a higher percentage than anywhere else in the world. "This is partly a relic of prevailing Christian attitudes which said that mothers should be home for tea time and partly down to the wide availability of well-paid 'first tier' part-time jobs."
- What Greece must do to receive a new bail-out (July 14, 2015). After challenging negotiations, Greece and its European creditors cut a deal, allowing the country to remain in the euro area.
- China's botched stock market rescue (July 30, 2015). Chinese stocks lost nearly a third of their value last summer. China's authorities "resorted to heavy-handed measures to prop up swooning share prices, from pressuring banks to buy stocks to blocking big investors from selling theirs."
- Why is the Nobel prize in chemistry given for things that are not chemistry (October 7, 2015)? Apparently, five of the last 10 Nobel chemistry prizes have been awarded for pursuits that might better be described as biology. A possible explanation is "the diversity of chemistry prizes reflects the fact that chemistry is found everywhere..."
- How the Fed will raise interest rates (December 14, 2015). Just as the Fed employed unconventional monetary tools to stimulate the economy, it is using new policy tools to try to increase the Fed funds rate.
We hope 2015 has been a memorable and rewarding year for you, and we look forward to working with you in the New Year.
Quote of the Week
"It is not enough to have a good mind; the main thing is to use it well."
--Rene Descartes, French philosopher, mathematician, and scientist
Golf Tip of the Week
Warm-Up Tips
Every tour pro knows the importance of warming up before you head out onto the green. Here are a few tips that can help you make the most of that time:
- Avoid the rush and head to the putting green. If the driving range is crowded, spend your warm-up time dialing in your short game.
- Use your head. Your warm-up should be mental as much as physical. Take some time to visualize the holes you'll be playing and develop a game plan.
- Stretch. Few things will help your swing more than some stretches to help your range of motion.
Financial Question of the Week
What is diversification and why is it important?
If you invest in a single security, your return will depend solely on that security; if that security flops, your entire return will be severely affected. Clearly, held by itself, the single security is highly risky.
If you add nine other unrelated securities to that single security portfolio, the possible outcome changes - if that security flops, your entire return won't be as badly hurt. By diversifying the investments in your personal financial plan, you have substantially reduced the risk of the single security. However, that security's return will be the same whether held in isolation or in a portfolio.
Diversification substantially reduces your risk with little impact on potential returns. The key involves investing in categories or securities that are dissimilar: Their returns are affected by different factors and they face different kinds of risks.
Diversification should occur at all levels of investing. Diversification among the major asset categories - stocks, fixed-income and money market investments - can help reduce market risk, inflation risk and liquidity risk, since these categories are affected by different market and economic factors.
Diversification within the major asset categories - for instance, among the various kinds of stocks (international or domestic, for instance) or fixed-income products - can help further reduce market and inflation risk. Diversification among individual securities helps reduce business risk.
Please contact my office if you or someone you know would like help diversifying your portfolio.
