Joseph Calderazzo and his colleagues believed the floor for a barrel of oil in 2015 would be about $40. The day in mid-January 2016 that Calderazzo, senior portfolio manager for US Trust, Bank of America Private Wealth Management, spoke at the City Club in San Francisco oil prices dropped below $27.
That day, a gallon of milk was worth two gallons of oil.
Plummeting oil prices, concerns about the slowdown in Chinese growth – what? China’s growth was still almost 7 percent last year – and the specter of higher interest rates in the U.S. all have led to a 9 percent drop on the S&P 500 index so far this year. Calderazzo told the San Francisco chapter of the Association for Corporate Growth that lower oil prices are good for consumers and companies that sell to the consumer – think airlines, vehicles, retail – but that a little more than 10 percent of the economy suffers from low oil prices, such as U.S. producers who can’t make money at under $30 a barrel.
Historically, stock indexes are supposed to be indicators of what the economy will perform in about a year’s time. Is this market predicting a downturn?
“In 2005, there were indicators of trouble: Rising unemployment, sky-high valuations of companies and rising interest rates,” Calderazzo said. “Today I’m looking at growth of revenue, of top and bottom line faster than the market averages.”
He’s also factoring in the unique aspect to the 2008 crash, because it was financial in nature, a systemic failure, rather than a pure economic recession. As such, it has been a long, slow climb since 2008. For example, last year’s gross domestic product, when numbers are available, is shaping up to be about 2.5 percent, Calderazzo said, adding that he believes 2016 will be closer to 3 percent. The chance of a recession this year according to his firm is less than 10 percent, and the Federal Reserve’s economists have it at 1 percent. Yes, the Fed Fund rate rose from zero to 0.25 percent, but it’s not exactly 5 percent and the Fed hasn’t begun selling off its purchase of bonds, so it’s still a supporter of cash liquidity, a nice way of saying easy money.
Calderazzo does not believe the market is signaling a pullback; he said that this bull market has another two or three years. But after that?
“Yields the next few years will be better but we’re getting to the end. This is not a precursor like 2007 was,” he said.
Bad economies produce more start-ups than good ones, because talented people lose their jobs and start their own companies. So these are not great times for young business, a trend that Calderazzo calls “de-risking.”
As far as investments, he likes sectors such as mobile communications devices, cloud computing, network security, discretionary consumer goods, health care and some information technology areas. Internationally he’s comfortable with investments in China, Japan, India and said that Europe is beginning a comeback.
What to avoid? Energy stocks. Tell that to most of America that owns big oil stocks as a hedge against, well, we don’t know what anymore with the oil glut.
“We need a floor on oil,” Calderazzo told the group. “What’s the floor? In 1986, oil was $11 a barrel. There’s no reason why the Saudis can’t make money at that level and they are not cutting production. They are sensitive to North American producers. Stockpiles in this country are at an all-time high. I don’t see a spike in the price of oil anytime soon. It’s going to be a tough go.”