The One Commodity That Could Fire US Stocks

The One Commodity That Could Fire US Stocks

Do you remember George W Bush’s presidency?

It might be worth reflecting on it for a moment.

You may recall that there was a disconnect in how Americans perceived him (at least in the beginning) compared with the rest of the world.

Americans saw a gun toting Texan that had embraced clean living. Everyone else saw a bumbling fool.

One wonders if the same dynamic is at play with Trump. No matter how idiotic or self-serving his ranting and actions are, his voting base doesn’t seem to mind.

They give him credit for the strong stock market and the good economy. Like all politicians, he takes the plaudits, despite mostly having nothing to do with it.

This is important…

People act on how they feel

Bloomberg reports that people out in Trump country can’t stuff money into their stock broking accounts fast enough.

They want to get in the market because they think Trump’s going to advance the US economy.

Normally I wouldn’t give such a report much notice. But, as I’ve mentioned before, I heard the same thing when I was over in the US last November.

A financial publisher told me that his readers believed the new president was changing the economy for the better. It was in his sales data.

The psychology of investing can be just as important as the numbers and ratios.

This is exactly the switch we need to see for the US market to go over the top.

We’re not there yet…but we have the strong base for it to take off right now.

The Wall Street Journal reports that most of the results are now in for the latest quarter. Earnings for companies in the S&P 500 are on track to grow 15% from a year earlier. That’s the fastest pace since 2011.

Trump is simply in power at the right time relative to the business cycle. And like Margaret Thatcher, he’s going to get a big lift from one thing in particular: oil.

North America’s abundant natural resources

On Monday, the International Energy Agency (IEA) said the US was likely to overtake Russia as the largest oil producer by 2023.

The output growth is so strong that the US might be able to meet its entire domestic demand for refined products like gasoline.

This entire shift in the energy market over the last six years or so has been enormous.

That’s not to say I agree with everything the IEA is saying. They seem to think that supply growth from the US can keep up with the growing oil demand worldwide.

We’ll see about that.

There are two points we need to consider here:

One is the fact that oil demand from China is likely to remain incredibly strong.

The second is that there’s every chance oil demand in India is going to explode.

That sure is a wildcard when you have the Federal Reserve raising interest rates in the US.

The shale oil fields in the US are certainly prolific. However, they decline at much faster rates than conventional wells.

That means more drilling and capital spending is constantly required to maintain the same level of production.

One way the shale drillers have been able to keep doing this is as a result of the low cost of debt. Even so, many of them still have negative cash flow, according to the Financial Times in December last year.

Debt is unlikely to be as cheap as it has been in recent years, and discoveries of new fields hit a low in 2017.

Shale drillers need a higher oil price.

Luckily for them, I think they’re going to get it.

Still, there’s no doubt that the US economy is going to get a huge tailwind from its energy resources.

In fact, the US trade deficit would be decidedly worse if domestic oil production wasn’t slowing the need for imports.

Not only that but, in general, the oil industry pays high wages.

For our purposes today, it’s enough to note that it’s been the technology sector that’s driven a lot of the gains in US stocks in the bull market up to now.

But Indian and Chinese demand could drive oil prices higher in the next year or two, giving US energy producers much stronger cashflows than they’ve seen in recent years.

It’s another reason I don’t see the US stock market going down in a big way anytime soon. Energy stocks have been in a weak environment since 2014.

I made the case in January that the US was more likely to see a ‘melt up’ over the next 18 months than a meltdown.

It’s been a slightly rocky road since. But the fundamental trends I see don’t change my outlook. It’s just a matter of navigating the volatility.

Now is the time to be buying up stocks. Particularly in the small-cap sector, which has the potential to make you outsized gains in the year ahead.

To discover what I believe to be are the hottest small-cap stocks on the ASX today, click here.

Callum Newman Signature

Callum Newman,
Editor, The Daily Reckoning Australia