The price of crude oil has plummeted 38% since the summer. Although some view lower prices as deflationary and a negative for the global economy, I think the reduction in energy costs is hugely bullish for domestic-centric equity investors. Here are three reasons why.
1: Crude Down, Earnings Up
Companies benefit either directly from lower crude prices (via cost reduction), or by the extra change jingling in consumer’s pockets. According to Goldman Sachs, each $10/barrel move in crude oil increases 2015 earnings by about $2 per share. This comes on the heels of third quarter results, which saw S&P 500 earnings increase 7.7%, according to FactSet.
2. Crude Is Going Even Lower
The downtrend in oil prices isn’t over. OPEC’s decision not to cut output is a signal that the cartel intends to start a price war. The objective is to inflict harm on other producers, such as the U.S. and Russia. But with significant increases in domestic production, OPEC doesn’t have the ability to influence the market as it did in the past. As a result, I see oil prices heading far lower than they are currently.
3. The U.S. Benefits Most From Lower Energy Costs
A combination of lower inflation, a reduction in the national debt and more consumer spending will propel U.S. economic growth upward. A stronger dollar will further support domestic consumption. Investors should maintain a home bias in their portfolios.