After eight-straight losing sessions, the Dow Jones Industrial Average ($DJI) might draw support Friday from stronger overseas markets overnight. Without much data or earnings news on the calendar, the focus sits squarely on OPEC amid talk that a crude oil production increase might be in the cards.
The timing of OPEC’s oil output decision isn’t clear. There’s a lot of talk on the Street about chances for output to rise, and Oilprice.com reports that OPEC (Organization of the Petroleum Exporting Countries) jacked up production even before today’s meeting of OPEC members.
Could More Crude Be Coming?
What’s unclear is exactly how much production might climb, assuming OPEC can agree on a plan. Estimates from various analysts quoted in the media range from 500,000 barrels per day to 1.5 million on top of the roughly 32 million barrels a day OPEC reportedly pumps now. Russia (not an OPEC member) and Saudi Arabia are among the countries pressing for an increase, according to Reuters, but they might run into static from Iran, which might not want to raise production after the U.S. left the nuclear deal it had signed with the country. An actual decision might not be announced until Saturday morning.
To put the possible output increase into perspective, if OPEC decides to raise production, say, one million barrels a day, that would be about 1 percent of world output. So we’re not talking about a huge figure. Sometimes it’s the psychology that really matters. Any sign that OPEC might be willing to go the other way after a year and a half of production cuts would probably send a major signal to the markets about a commodity that plays such a key role in the world economy.
Going into the meeting, U.S. oil stockpiles have come down about 100 million barrels from early 2017, thanks in part to OPEC’s production cut. That’s helped lift U.S. oil prices about 45 percent from a year ago even as U.S. producers continue churning out crude at historically high levels of more than 10 million barrels a day. The U.S. recently put public pressure on OPEC to raise production, and it’s possible it could get its way. Whether that would be enough to bring oil prices down further is yet to be seen, but even the rumor of a possible production increase has helped move crude oil prices down to around $65 a barrel now from a nearly four-year peak above $73 in May.
OPEC Outcome: Who Could Gain or Lose
If oil production rises and sends prices down, that could possibly be bullish for transport companies like airlines and railroads as their input costs would conceivably fall. It might be good news for retailers like Walmart Inc. (NYSE: WMT) and Amazon.com, Inc. (NASDAQ: AMZN) as well, since shipping costs can be a factor for them. Restaurants and other entertainment businesses might benefit if people can fill their tanks for less. Energy companies, on the other hand, typically see their stocks fall when oil prices come down.
What doesn’t seem likely is a repeat of late 2014, when OPEC decided not to lower production and oil prices spent the next year heading sharply down to as low as $26 a barrel by early 2016. At that point, the extra oil flowed into a world economy that was far less healthy than it seems to be now. The U.S. and Chinese economies appear to be in better shape than they were in 2015 and early 2016, helping keep oil demand strong and potentially putting a shelf under prices. There’s also a chance OPEC might not agree on an output hike, in which case the oil market might veer back upward. If OPEC doesn’t agree to raise production, however, that doesn’t mean it won’t rise anyway. OPEC members haven’t always strictly followed the organization’s rules. We’ll have to wait and see.
Another Lost Day For Dow Jones Industrial Average
Unless you’re heavily invested in real estate or utilities, Thursday was probably a day to forget. Even the Russell 2000 (RUT) and Nasdaq (COMP)—both of which had been weathering the recent storm pretty nicely as some investors thought techs and small-caps could conceivably have protection in a tariff battle—weren’t able to keep their heads above water on a day when nearly every sector fell.
The Dow Jones Industrial Average ($DJI) has finished lower the last eight sessions, its longest losing streak in more than a year. The DJIA hasn’t fallen nine straight days in 40 years, by the way.
There’s nothing really new here, as tariff concerns continue to weigh on DJIA components like Caterpillar Inc. (NYSE: CAT), Nike Inc. (NYSE: NKE), and Boeing Co (NYSE: BA), but a couple other elements were in the mix Thursday as well. Energy components like Exxon Mobil Corporation (NYSE: XOM) and Chevron Corporation (NYSE: CVX) got bumped by concerns about potential rising oil output, and Intel Corporation (NASDAQ: INTC) fell more than 2 percent as its CEO resigned.
Energy was the worst sector performer of the day, dropping nearly 2 percent as investors awaited today’s OPEC meeting. Generally, the so-called “FAANG” stocks in the info tech sector have done pretty well over the last month even as trade fears rise. That wasn’t the case Thursday, as all five FAANGS finished lower.
Figure 1: Losing Energy: The U.S. stock market hasn’t exactly been lighting the world on fire over the last month, but the energy sector has been especially weak. This chart shows the S&P 500 energy sector (candlestick) vs. the S&P 500 Index (SPX). Energy stocks have been under pressure in part due to talk of a possible OPEC crude oil production hike. Data source: S&P Dow Jones Indices. Chart source: The thinkorswim® platform from TD Ameritrade. For illustrative purposes only. Past performance does not guarantee future results.
Though biotech stocks took a beating Thursday, they’ve generally been pretty healthy recently. This might be in part because unlike some other sectors, biotech could be protected a bit from tariff battles simply because of the nature of its products: They’re hard to duplicate with something local if they’re suddenly unavailable. Another possible factor in biotech’s strength could be the current mergers & acquisitions (M&A) environment, where lower taxes due to last year’s U.S. legislation might have some big pharma companies in more of a buying mood. The strong economy and continued pressure on big pharma to replenish its pipelines also could be playing into hopes for more biotech M&A in the second half. Over the last month, the Nasdaq Biotechnology Index (NBI) rose more than 5 percent, about the same as its year-to-date performance.
Waiting for Q2 IPO Box Score
The same tax legislation that seems to be helping give biotech a boost might also be aiding the market for initial public offerings (IPOs). With Q2 almost over, we should have statistics for the quarter soon after a Q1 that was the best for IPOs since 2016, with nearly $44 billion raised by 16 companies, according to MarketWatch. The preponderance of IPOs this year has been in the tech space, and some of the tech IPOs that were launched enjoyed blistering early gains in price. Getting in early on an IPO might sound tempting, but long-term investors might want to exercise caution and keep in mind that these things can go down as well as up.
For instance, some of the companies that speculators think might file this year appear to have lofty valuations, according to some analysts, who have noted that some of these companies are still operating at a loss and there isn’t a clear path to profitability. Just like with any other investment, it’s important to do your own homework and review some IPO basics so that education, not hype, drives your decision-making.
Need Some Earplugs?
A phrase that regular readers of this column are probably familiar with is “tune out the noise.” Especially if you’re a long-term investor, it’s important to stick with your plan while giving it a look around this time of year to make sure you’re still comfortable with your allocations. Reacting to the latest headlines and near-term market gyrations ultimately can cause a lot of stress and possibly disrupt your strategy. Apparently, this column isn’t the only place where you’ll hear similar sentiments. “We believe investors will be better served with a long-term focus while trade policies and volatility are ironed out,” research firm CFRA told investors in a note this week. Well said.
Information from TDA is not intended to be investment advice or construed as a recommendation or endorsement of any particular investment or investment strategy, and is for illustrative purposes only. Be sure to understand all risks involved with each strategy, including commission costs, before attempting to place any trade.