Recipe for a happy Thanksgiving
Investors have a lot for which to be thankful. The labor market hasn’t been this robust in half a century, the annualized pace of wage growth has doubled over the last decade, the stock market has more than quadrupled since the bottom of the Great Recession in March 2009 and at 126 months and counting, the current U.S. economic expansion is the longest in history, with no recession on the horizon before the first half of 2021 at the earliest. With low interest rates, benign inflation and an 11% decline in gasoline prices over the past seven months, that’s a recipe for a favorable holiday season now and a potential re-acceleration of economic and corporate profit growth in 2020.
Over the river and through the woods As anecdotal confirmation of the aforementioned strength in the economy and the financial markets, people clearly are motivated by these solid fundamentals to travel in near-record numbers this year, according to the American Automobile Association (AAA). An estimated 55.3 million people will travel at least 50 miles away from their homes over the extended Thanksgiving weekend by car, plane, train, bus or cruise ship. That’s a 2.9% increase of 1.6 million travelers year-over-year (y/y), marking the second-highest number (behind 2005) of Thanksgiving travelers since AAA began recording data in 2000. Air travel is expected to be even busier, with an estimated 4.45 million travelers representing a 4.6% y/y increase.
Lower energy prices boost consumption Crude oil (West Texas Intermediate) prices have been locked in a relatively tight $50-60 per barrel trading range over the past seven months, awaiting further news on a number of fundamental and geopolitical developments. From an overbought peak of $77 in October 2018, prices have fallen about 25% to $58 on better global supply and demand balance.
Officials from the 14 nations that comprise the Organization of the Petroleum Exporting Countries (OPEC)—along with 13 non-OPEC countries, including Russia—will convene next week in Vienna, Austria, to discuss possibly extending their agreement to cut production by 1.8 million barrels a day from the current March 2020 deadline until perhaps year-end 2020.
Lagging gas prices have fallen about 11% over the past seven months, from $2.90 to $2.59 per gallon. The rule of thumb is that every 1-cent decline at the pumps boosts consumer discretionary spending by about $1.2 billion. So this latest decrease in gas prices could potentially boost GDP by an estimated 15 to 20 basis points annually, which could support stronger consumer spending during both Thanksgiving and Christmas.
Stronger dollar keeping a lid on oil prices During 2018, U.S. GDP growth was 2.9%, the Federal Reserve orchestrated four quarter-point interest rate hikes (taking the fed funds target to an upper band of 2.5%) and the dollar rallied versus the euro by about 10% (from a February peak of 1.25 to 1.15 dollars to euros at year-end). As a result, WTI plunged by 45% during the fourth quarter, from $77 per barrel to a year-end price of $45. This year, we expect GDP to slow to 2.3%, and the Fed actually has cut rates three times over the past five months to an upper band of 1.75%. We had expected the dollar to weaken versus the euro, but it’s actually strengthened year-to-date by another 5% to 1.10 currently. While crude oil rallied by 50% to $67 per barrel to start the year through April, WTI has corrected by about 15% over the past seven months to its current price of $58.
China trade skirmish has slowed energy demand The trade and tariff war between the U.S. and China has been dragging on for 19 months, and this uncertainty has had a negative impact on CEO confidence, corporate spending, productivity, and economic and corporate-profit growth. Consequently, the resulting slowdown in the world’s two largest economies has pressured energy prices, due to the expectation of relatively sluggish demand. But if we see a skinny “Phase One” agreement signed before year-end, energy prices could increase over the next few quarters.
Fracking trends remain strong At about 12.8 million barrels of oil produced each day (BPD), the U.S. is now the world’s largest crude producer, surpassing No. 2 Saudi Arabia’s 12 million and No. 3 Russia’s 10.8 million. From 10 million in early 2018, this 28% surge in U.S. supply, in conjunction with slowing global demand, has helped destabilize the energy market over the past 18 months. However, the U.S. rig count has declined by about 26% over the last year to 803 rigs currently, indicating domestic production may be peaking.
Day late and a dollar short? The long-awaited Aramco initial public offering (IPO) is the cornerstone of Saudi Arabia’s “Vision 2030,” a longer-term strategy to reshape the Saudi economy and reduce its dependence on oil revenues. Crown Prince Mohammed bin Salman had promised a hugely successful IPO of a 5% stake in its national oil company, Saudi Aramco, during the second half of 2018. He estimated Aramco’s value at $2 trillion, planned to list the shares on the New York, London, Hong Kong and Tadawul stock exchanges, and hoped the IPO could raise $100 billion to help balance Saudi Arabia’s budget deficit.
After delays, the plan that finally was unveiled last week called for Aramco to sell only 1.5% of its shares only on the local Tadawul exchange at an estimated price range of $8-8.50 per share, which would value the company at approximately $1.6-1.7 trillion and raise only $25 billion. But that may still be overstating the case. With the decline in energy prices, international investors are thought to value Aramco at only $1.2-1.5 trillion, so this IPO may disappoint.
Happy Thanksgiving, everyone!