Fiscal Cliff 2013: For Energy Investors It’s Going to Be Like Fishing in a Barrel
By Dr. Kent Moors, Global Energy Strategist
There are 26 trading days and counting until the U.S. reaches the fiscal cliff.
Except, this time, something big has changed. And it’s all because of the electorate.
Second, at the first indication of a settlement, this over-emotional roller coaster the market has been riding will straighten out – and start moving up. We are seeing some initial indications that the primary decline is flattening out. Volatility remains high, and there is a double whammy enticing investors to sell.
On the one hand, if you believe the cliff is going to happen and taxes on dividends are going up, selling winners now makes sense to save on what you pay to dear Uncle Sam after the fact.
On the other, if the dreaded fall occurs, stocks are going to take another major hit. That becomes a second pressure to sell, this time just about any stock whether in the red or the black right now.
All of this is resulting in a seriously oversold market. When the cliff is averted a bit more than a month from now, an image of fish and barrels comes to mind.
Fiscal Cliff Fallout: Energy Shares to Rebound Leading me to the third and most encouraging point.
With the up-and-down cycles we have witnessed over the last 18 months, an overriding trend has emerged. A pronounced move down in the market as a whole has usually resulted in energy share prices falling faster.
But when the recovery occurs, energy not only leads shares up but by a stronger rate than the initial descent. With both the Energy Advantage and Energy Inner Circle Portfolios, when the dust has cleared from a move down followed by a move up, investors have actually witnessed overall gains.
The recovery hitting, therefore, will primarily benefit the energy sector, as it has in each of the recent examples. But it will do so with higher returns than the market as a whole.
There is a simple encompassing reason as to why.
All of the hand wringing currently taking place centers on the economic impact of the cliff hitting – lost employment, contracting business investment, diminishing tax revenues, a declining ability of government expenditures to jump start designated market sectors.
All of these essentially end up being moves down on the demand side of the equation. Thereupon, the conclusion is that everything from industrial production, through gasoline usage to retail sales will be affected, with energy need declining as a result.
This flows from the simple pervasive position held by energy and its usage throughout the economy.
Once the curve starts rising, so does the perceived energy requirements.
And, as investors, we will be off to the races.