Oil prices, Markets down - What's going on?

Oil prices fell heavily over the weekend, with Brent Crude currently down about 26% compared with Friday’s close. That’s seen the stock market fall too, with the FTSE 100 opening down 8.7%. If the market closes where it opened, this would be one of its worst days since 1987.

The falls follow the decision by Saudi Arabia to launch a price war in the oil market after Russia refused to take part in production cuts planned by oil cartel OPEC. Markets have already been volatile in the last few weeks as worries about the impact of coronavirus grow. Gold prices are down about 1.3%, but 10-year US government bonds have been rising and are now yielding less than 0.5%.

Is cheap oil a bad thing?

A weak oil price directly impacts the revenues of oil majors like BP and Shell. They’re huge companies that make up a big portion of the FTSE 100, so seeing them down about 20% each has a knock-on effect to the index. Lower oil prices aren’t always a bad thing, it can mean lower input costs for lots of businesses. One of the key beneficiaries would normally be the airlines, but I’m sure I don’t need to explain why the airlines aren’t having the best of times at the moment. Coronavirus heavily dampening demand will put a lid on any benefits they’d otherwise see. Lower oil prices can act like an effective tax cut by increasing demand across the board. But demand might not be the problem. Fears around the coronavirus are all about supply – if people can’t get to work they can’t make the products or provide the services others want.

What’s happened in the past?

The financial crisis, which many believed would be the end of capitalism, saw UK markets down 46%. That was peak to trough, over the course of 489 days. As things stand the FTSE 100’s gone from over 7,500 to under 6,000 in less than a month. That’s steeper than most falls we’ve seen before. The difference between now and the financial crisis is that governments don’t have as much policy firepower to throw at the problem. A decade ago, the Bank of England dropped interest rates by a few percentage points. That provided a boost and arguably pulled us out of recession sooner than if they hadn’t moved interest rates at all. Before the coronavirus outbreak economic fundamentals looked positive overall. But while the fall in market prices today might feel like an immediate overreaction, we don’t have the same toolbox to address an economic slowdown.

What do we think happens next?

The next few weeks, at least, are likely to be a bit of a rollercoaster. While this carries on, think of forecasters like weathermen. We listen to what they say, but we don’t entirely believe them. Remember volatility is a two-way street. The biggest daily market gains often follow the biggest falls, as always there are no guarantees. We’re not forecasting the end of this spell, and the least you can do is take an umbrella. That is, make sure you’re properly diversified. That doesn’t just mean own shares of companies in different countries. It means have a wide range of different investment types.

DIVERSIFICATION IS KEY

For those investing for the long-term, we usually suggest not paying too much attention to short-term events. Lots of people will already be investing each month and making the most of lower prices. If you’ve got a shorter investment horizon, or simply aren’t a fan of risk and volatility, it could be time to have a long hard look at your portfolio. Could you handle a shock of 30, 40, 50% of the value of your investments? If not, make sure you have the right balance of investments to support your intentions and cash requirements leaving you enough time to ride out the storms.

The most straightforward way to ensure diversification is Diversification by Asset Class. This means spreading the assets across a number of different sectors that move in different ways during the same market events (negatively correlated). The main asset classes used in an investment portfolio include

• Stocks—shares or equity in a publicly traded company
• Bonds—government and corporate fixed-income debt instruments
• Real estate—land, buildings, natural resources, agriculture, livestock, and water and mineral deposits
• Exchange-traded funds (ETFs)—a marketable basket of securities that follow an index, commodity, or sector
• Commodities—basic goods necessary for the production of other products or services
• Cash and short-term cash-equivalents (CCE)—Treasury bills, certificate of deposit (CD), money market vehicles, and other short-term, low-risk investments