Experienced wrote: Obscure1 wrote: I have lived through a few recessions and dabbled in the market a bit myself.
An inverted yield curve is a great indicator of an impending recession, but many inverted yield curves don't result in a recession. It really depends upon how inverted the curve gets and for how long. Temporary inversions are typically meaningless while extended and steep inversions are better indicators of significant market corrections.
So where does the current yield curve inversion stand in terms of comparisons? Right now, the inversion is pretty steep. However, the real questions imo are whether the inversion is increasing or decreasing and how fast the inversion revert back to a normal yield curve?
The jury is still out on that one. Today, we get numbers (feedback) faster than every before and in far greater variants.
Does the 8.5% CPI figure from July represent a meaningful reduction from the 9.1% number in June or is it a one-off due to lower gas prices reducing the price of everything.
I personally don't think the PMI numbers are as relevant as they used to be but Experienced obviously still tracks them carefully. Then we have GDP numbers etc.
I agree with Experienced that recessions are not kind to the market, but....there's always a but....a number of factors play into the severity of the downturn in regards to share prices such as:
* how frothy was the market at the top
* what percentage is the market down already from the top
* how severe will the recession be
* how much higher are interest rates likely to go before they max out
* how long will it take before the market stops fearing additional interest rate hikes
How does all of this affect SU? For starters, SU as an integrated oil company remains somewhat insolated from the market at this stage. Oil production continues to falter due to many years under-investment which isn't likely to change as long as western government maintain a bearish stance on oil. As such, it is difficult to see oil prices dropping signficantly. In fact, oil prices are probably heading higher for longer.
I agree with Experienced that eventually thing regress to the mean, which in the case of oil would be the marginal cost of production. However, with inflation of the cost of all aspects of oil production still heading higher and demand outpacing supply, it is easy to see the marginal cost actually going higher. We saw that this past quarter with SU but SU gets off lucky because their reserves are staring them in the face. Anyone looking to build or even replace reserves is in a very different position.
Nobody but my family cares where I think where oil prices are going or how that will affect SU. My contibution to this thread is to try to add ideas for people to process in their journey. I feel it is the least I can do in return for the valuable info that I get from the thread as I know squat about oil.
Good points as usual my friend.
Some additional thoughts....
1.....while I have not put much credence into a declining yield curve as an indicator of an impending recession like many economic commentators, if you do subscribe to that theory then the inversion this time around has been persistent - can't recall how long but it's been at least a month and it has gotten steeper. A few weeks ago the delta between the 2 and 10 year was in the high teens and now it is approaching 40 basis points.
2....for me, as I mentioned in my previous post, I am concerned about the wage growth spiral feeding future inflation. This combined with declining productivity rates in the US lays the groundwork for persistent inflation for the foreseable future. If that trend continues and I believe it will for a while since productivity is directly related to the rate of business investment which has declined in terms of a growth rate and with higher interest rates will decline further, a 5% annual increase in wages will translate into somewhere around 4% growth in prices.
3.....from Point 2 - the US discount rate is 2.25-2.5%. So even if the inflation rate falls to say 4% in line with the contribution of wage inflation, historically the discount rate would need to be about 4.0 per cent which means The Fed would need to raise the discount rate by another 1.5-2%. Compounding this is if The Fed continues to reduce its balance sheet, this will have an even greater effect on interest rates than the actual rate hikes. So when you add the effects of the two things you get much higher effective interest rates on the economy.
4....from Point 3 - as I mentioned in the previous post, there is a wide spectrum of investors in the market with varying objectives and tolerance to risk. Due to The Fed policy of zero discount rates, many people who would normally have fixed income portfolios have been forced into the stock market at an uncomfortable level of risk for them. Their presence (money) has fuelled the rise in the stock market. As interest rates rise these people will migrate back to the comfort level in fixed income and take money out of the stock market resulting in lower asset prices in the stock market. Further, higher interest rates will take a bite out of money people with mortgages have to invest in the stock market. As a case in point, one of my kids bought a house a couple of years ago with a 1 million dollar mortgage at 1.9% interest. If my scenario in Point 2 holds true, then they will be refinancing in another year at 5-6%. On a million dollar mortgage that is a huge increase in monthly payments to finance.
5....so while you make great points about the potential impact of a recession on the stock market depending on other factors, I see the interest rate increases as I laid out above more like Chinese water treatment or death by a thousand cuts.
6....as for the energy sector being imune to a downturn in stock prices, I see that view as more of a hope than reality. I lived through the Great Recession just before I retired from the business and the SPs of Canadian banks went down by 50% even though their profits were relatively stable and they became screaming buys in 2009 when the market turned around. The same will happen to SU and other energy companies, if my prediction about a recession becomes a reality - it's just a fact of life and to think otherwise would suggest that one believes that such an event would defy almost 200 years of history.