OPEC is continuing its price-war strategy against U.S. shale, an effort reaffirmed just last week when Saudi Arabia’s energy minister said his country’s output strategy “is a reliable policy and we won’t change it.” The market is shuddering at the thought of Iranian crude hitting the market as economic sanctions are lifted in the months to come.
Goldman Sachs recently warned clients that a drop to the $20-a-barrel level could be necessary to force the production cuts needed to balance supply and demand. Energy stocks and the high-yield bonds of shale producers will hitch their fate to whether this scenario plays out.
The only positive development for energy in recent weeks has been the political rift incited by Saudi Arabia over the weekend when it executed a Shia cleric who had long been a thorn in the side of the Sunni regime. Protesters in Iran, which is largely Shiite, set fire to the Saudi embassy in Tehran. The Saudis then broke relations with Iran. If traders sense there is a chance of armed conflict between the two exporters that could interrupt the transport of oil out of the Persian Gulf, the price of crude could get a major boost.
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Because of the drag from a stronger dollar (which hits foreign earnings) and weak oil prices (which hits energy-sector profits), overall S&P 500 earnings growth is expected to record a drop in the fourth quarter for the third consecutive quarter, according to FactSet. That has not happened since the financial crisis of 2008-09.
Specifically, earnings are expected to decline 4.7% in the quarter vs. the same period in 2014. This is a big markdown from the 0.6% drop expected at the end of September. Energy and material earnings are the big drag here. Analysts are pretty dour on the outlook for energy companies’ fundamentals in 2016 as well, with aggregate earnings estimates down 15% since September for a year-over-year earnings decline of 8% now expected for the calendar year.
It’s certainly possible that bulls could step into the breach here with sentiment depressed and expectations low. Energy stocks would be prime candidates to lead that charge normally, but with earnings structurally restrained by the oil glut it will likely be up to the usual suspects, health care and technology, to save the day for bulls.
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America Is Graying Gracefully
A lot of experts are trying to explain why the market was so flat in 2015. One good theory is that the population of the United States is aging, and becoming more risk averse. To learn more about how fast the country is graying, I visited the U.S. Census Bureau website, which has quite a font of information if you want to kill a few hours going through presentations and tables.
— The Census Bureau projects that the U.S. population will be 322,762,018 on Jan. 1, 2016. This represents an increase of 2,472,745, or 0.77%, from New Year’s Day 2015. Since 2010, the population has grown by 14,016,480, or 4.54%.
— In 2016, the United States is expected to experience one birth every eight seconds and one death every 10 seconds. Meanwhile, net international migration is expected to add one person to the U.S. population every 29 seconds. The combination of births, deaths and net international migration increases the U.S. population by one person every 17 seconds.
— The projected world population on Jan. 1 is 7,295,889,256, an increase of 77,918,825, or 1.08%, from New Year’s Day 2015. During January 2016, 4.3 births and 1.8 deaths are expected worldwide every second, according to the Census Bureau.
For an up to date assessment of the population, click here to see the U.S. and world Pop Clock.
Digging a little deeper, I was surprised to learn that the median age in our country was 28.1 in 1970, is 37.8 today, and is projected by the Census Bureau to be 41 in 2060.
Some other stats from the Census projections:
— The U.S. population is projected to rise from 314 million in 2012 to 420 million in 2060; the 400 million mark is expected to be reached in 2051.
— The percentage change in the population by age group over the next 45 years is expected to be largest for the five-year cohort aged 65 and older, as better medicine and nutrition help people stay alive longer. The size of the cohort aged 65-69 is projected to grow 64% by 2040; 70-74, 104%; 75-79, 131%; 80-84, 130% and 85+, 208%.
— The percentage of people identifying as Anglo is projected to decline to the statistical minority by 2043.
— The latest state to reach the 10 million in population threshold is North Carolina. The chart above shows the most populous states, led by California (39.1 million); Texas (27.4 million); Florida (20.2 million); New York (19.7 million); Illinois (12.8 million); Pennsylvania (12.8 million); Ohio (11.6 million); Georgia (10.2 million); and North Carolina (10.0 million).
For more projections from the U.S. Census Bureau, click here and here. All in all, you can see why health care should continue to be a key focus of investment over the next several decades.
Best wishes,
Jon Markman
