The S&P 500 Index declined sharply last week as sinking crude oil prices precipitated fears of a credit contagion similar to the financial contagion spawned by the subprime mortgage industry collapse of 2007 and 2008. Specifically, the catalyst was Kinder Morgan (KMI), the country’s largest oil and gas pipeline operator, which cut its dividend by 75% and sparked fears of a credit rout amongst the banks that lend to the industry.
We would remind regular readers that falling energy prices have both negative and positive effects. The market is currently fixated on the damage inflicted upon the earnings of commodity producers. However, commodity users and consumers (think of yourself at the gas pump) are helped meaningfully by lower oil prices, which also helps keep inflation contained and relieves the Fed of pressure to raise rates. One research group estimates that the average consumer will save $600 per year at these price levels.
Investors, of course, are all about the Fed meeting this week. Since the Fed is expected to raise rates on Wednesday, it would most likely confuse the markets and cause significant uncertainty about the state of the economy if the Fed held steady. Recall that when the Fed ended the various QE (quantitative easing) programs, there was no noticeable market or economic impact. A similar (non)reaction to a long-awaited (and long-telegraphed) Fed hike would not surprise us.
It seems almost mandatory to opine on whatever the Fed decides to do (or not do) this week, so we will join the commenting fray later in the week. Until then, all the best to you and yours this Christmas and holiday season.