Oil spike raises portfolio questions
Monday, 18 May 2009
Oil prices have shot higher in recent weeks as investors anticipate a rebound in the global economy. While many economists expect the economic rebound to be tepid at first, that has not slowed the advance in oil, according to The Wall Street Journal.
For individual investors, the rise in oil prices means it's a good time to think about the role commodities should play in your portfolio. In the wake of the global financial crisis, commodity prices plunged. Now that the economy is starting to come off the mat, those prices have started rising.
Indeed, the government reported that the US trade deficit unexpectedly widened in March for the first time in eight months. The reason? The rising price and use of imported oil.
Investors are referring to this phenomenon as the "reflation" trade. The basic notion is that with so much fiscal and monetary firepower aimed at the financial system, the economy is bound to get moving again. And when it does, that policy largesse will likely lead to rising commodity prices, as consumers and busineses use more energy and raw materials.
As the global economy recovers, demand from China, India and other countries will also ramp up. It was increased demand from these countries that contributed to the jumping commodity prices before the global economic downturn.
Commodities "may turn out to be especially likely to benefit from all the liquidity provided by governments around the world," says Ed Yardeni, head of Yardeni Research.
Meanwhile, in its efforts to jumpstart the economy, the US has pushed down interest rates, reducing the appeal of fixed-income investments. Short-term, safe investments such as Treasury bills are paying almost no interest. The Federal Reserve also has taken the unusual step of purchasing longer-dated Treasurys, in order to drive those yields lower as well, helping to lower mortgage rates.
That leaves investors with fewer choices to earn returns. Usually such a policy scenario would drive real-estate prices higher, and that is likely to take place eventually. But the bruising the real-estate market took in the past few years will make its recovery sporadic.
Instead, investors have started focusing on commodities and stocks. The stock market has jumped smartly from its early-March lows and now commodities are starting to follow suit.
Oil prices have grabbed headlines recently as prices have ticked up to around $57 a barrel. For several weeks, oil has rallied along with the stock market as investors bet on revived growth quickly draining supplies. Strikingly, oil prices have continued to rise even as the stock market has consolidated its recent gains. This increase comes even as supplies are at very high levels, underscoring the momentum behind the move.
For individual investors, the rise in oil prices means it's a good time to think about the role commodities should play in your portfolio. In the wake of the global financial crisis, commodity prices plunged. Now that the economy is starting to come off the mat, those prices have started rising.
Indeed, the government reported that the US trade deficit unexpectedly widened in March for the first time in eight months. The reason? The rising price and use of imported oil.
Investors are referring to this phenomenon as the "reflation" trade. The basic notion is that with so much fiscal and monetary firepower aimed at the financial system, the economy is bound to get moving again. And when it does, that policy largesse will likely lead to rising commodity prices, as consumers and busineses use more energy and raw materials.
As the global economy recovers, demand from China, India and other countries will also ramp up. It was increased demand from these countries that contributed to the jumping commodity prices before the global economic downturn.
Commodities "may turn out to be especially likely to benefit from all the liquidity provided by governments around the world," says Ed Yardeni, head of Yardeni Research.
Meanwhile, in its efforts to jumpstart the economy, the US has pushed down interest rates, reducing the appeal of fixed-income investments. Short-term, safe investments such as Treasury bills are paying almost no interest. The Federal Reserve also has taken the unusual step of purchasing longer-dated Treasurys, in order to drive those yields lower as well, helping to lower mortgage rates.
That leaves investors with fewer choices to earn returns. Usually such a policy scenario would drive real-estate prices higher, and that is likely to take place eventually. But the bruising the real-estate market took in the past few years will make its recovery sporadic.
Instead, investors have started focusing on commodities and stocks. The stock market has jumped smartly from its early-March lows and now commodities are starting to follow suit.
Oil prices have grabbed headlines recently as prices have ticked up to around $57 a barrel. For several weeks, oil has rallied along with the stock market as investors bet on revived growth quickly draining supplies. Strikingly, oil prices have continued to rise even as the stock market has consolidated its recent gains. This increase comes even as supplies are at very high levels, underscoring the momentum behind the move.