A comment on the current state of our stock market:
When we invest in stocks for clients, we are essentially paying for a future stream of earnings of companies discounted to today’s dollars. We want to have as much confidence in the stability and growth of the future earnings of those companies as possible. Any global trends which have the potential to negatively impact earnings flow on a broad scale will disrupt the market price of common stocks. The approximately 70% decline in the price of oil over the past year is one of those global trends that is currently affecting common stock prices.
The drop in the value of oil is a double-edged sword. On the positive side, many of our oil-based consumer items as well as gasoline will be much cheaper for the consumer. However, on the negative side, oil is now at a price where many smaller producers cannot make money and are forced to make layoffs or shut down completely.
Sixty years of investing on behalf of clients has taught us that while markets are cyclical and global trends affect market behavior, it is ultimately earnings growth that drives long term stock prices. After a strong six-year bull market from 2009 through 2014, the equity markets have experienced downward pressure since May of 2015. Whether this decline in equity prices is a much needed market correction or the beginning of a bear market is not yet apparent.
What is apparent is that the drop in oil prices has been one of the main catalysts for the market decline. We also know that this will pass in time and that stocks will once again get back to reflecting their future earnings, until we face the next major global trend.
Alison J. Gamble, President
Gamble Jones Investment Counsel