As consumers, we love low oil prices for the savings we receive at the pump. As investors in energy companies, we love high oil prices for the earnings and dividends.
Over the past 18 months, we’ve seen oil prices fall precipitously from around $100 per barrel to below $40 per barrel as of year-end. Similarly, big oil players such as ExxonMobil, Chevron and BP have seen declines in their stock prices of 23%, 31%, and 41%, respectively. Is this a value investment opportunity? Could be. Can oil prices fall further? Possibly. However, why worry or attempt to time or choose specific sectors of the stock market to invest in like energy, technology or healthcare? Just like other market events, it would be difficult, if not impossible, to consistently predict drops like we’ve seen in oil, and to determine how long prices will stay this low.
Instead, let’s consider how the prolonged drop in oil prices and the corresponding decline in energy stocks play into the overall stock market indices. For the MSCI All Country World Index (ACWI), the energy component makes up just 6.1% of the overall index. Over that same 18-month period, the global energy sector fell in price by 43%, while the overall MSCI ACWI declined by just 7%. If you owned only a market index, which would remove company- and industry-specific risk from your portfolio, the decline would have been dampened. In fact, when oil prices drop, consumers use those savings from the gas pump to buy products and services that boost other parts of the economy. In addition, industries whose costs are heavily impacted by oil prices, such as airlines and transports, greatly benefit from this shift. This leveling effect provided by investing in various indices can more importantly help keep you from falling off course from reaching your financial goals.
As a result, we continue to believe in the long-term benefits of broad-based diversification provided by investing in indices across the globe.