The Energy Upside of the Fiscal Cliff
There are 29 trading days and counting until the U.S. reaches the Fiscal Cliff.
That’s how many trading sessions remain before massive (and automatic) tax increases and expenditure cuts take effect.
And in the roll up to this non event (more in a moment), energy shares have been hit hard.
Well, three points up front to put some sanity into this overwrought conversation.
First, the cliff will never take place. Pundits are treating this like some definitive confirmation of a Mayan prophecy.
CNN has what amounts to a daily “cliff dive,” giving us the next eagerly awaited pearl of wisdom on yet another calamity to befall if the mess hits. CNBC is handing out “Rise Above” buttons with great fanfare to oblige politicos to move away from partisan rancor.
Great! The three-piece suits inside the Beltway would never have figured out what needed to be done without a button. They know and they will kick something (a can, an accounting device, a legislative reprieve) further along before the deadline hits.
This is a grand nonevent; it will never take place, especially after the election we just experienced. With an impending budgetary crisis looming, the Senate Republican leadership put defeating Obama as their number one goal (a “let’s show everybody that the real issues are less important than politics” approach if there ever was one).
On the other side of the aisle, the Democratic leadership cast the situation as a “saving of the American dream,” after failing to curb an unemployment trend or reassure small business about prospects.
So here we are back where we started before the costliest campaign season Americans have ever witnessed.
Except, this time, something big has changed. And it’s all because of the electorate.
All of the posturing is done. All of the TV ads are history. And all the consultants have been paid. Yet nothing has changed. There are no further excuses. If there is one thing the electorate said loud and clear two weeks ago, it is this.
Blaming the other guy isn’t working.
Congress and the White House have that message. Both parties will now learn how to play together. The nation has no further interest in hissy fits, temper tantrums, or time outs. We may not like all of what is coming, but these folks will finally earn their salaries.
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 currently 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.
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 that 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.
[Editor’s Note: To learn exactly how energy investors are seeing these gains and what Kent’s recommends right now, click here now.]
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.