What Falling Oil Prices and a Rising Dollar Mean for You
Two of the most notable economic developments of recent months are the dramatic decline in oil prices and the resurgence in the value of the U.S. Dollar against other currencies. Both have an economic impact, which could translate to an investment impact as well. Let's consider how these two trends might affect the investment markets.
Cheaper oil – the pluses and minuses.
The price for a barrel of light crude oil on the New York Mercantile Exchange dropped from $107.30 on June 20, 2014 to half of that level, $53.04, by the end of 2014. Oil prices are unpredictable and subject to fluctuation. Yet today, worldwide oil supplies are growing faster than current demand, so prices may stay relatively low in the near term.
Broadly speaking, lower oil prices are considered a favorable trend to help bolster economic growth, which can be a positive development for some stocks.
Consumers are clearly among the major beneficiaries, as the cost of a tank of gas has dropped significantly since mid-2014. The savings realized at the gas pump could be a boon to other parts of the economy, such as retail businesses, as consumers have more ability to spend on other types of purchases. Businesses that are heavy energy users (airlines, transportation firms, some industrial companies) should see costs go down as well, which might help improve their bottom lines. Countries that rely on oil imports will benefit from the trend as well. By contrast, the drop in prices has created significant challenges for some oil exporting countries, with Russia and Venezuela as two notable examples.
The recent boom in U.S. Oil production also could mean that the drop in oil prices puts pressure on some companies and sectors of our own economy. Oil companies are seeing profits decline as a result of the price drop. Firms that provide services to the oil drilling and production industry may also experience slower business activity if prices remain low.
The impact of the dollar's recovery.
The dollar experienced a significant rally in recent months. While the degree of change varies depending on the currency it is measured against, a good example is how the dollar fared against the euro, Europe's common currency. As recently as May, 2014, it took $1.39 to purchase one euro. By the end of the year, a euro cost only $1.21, and the dollar has continued to strengthen in 2015. A stronger dollar is good news for Americans traveling overseas. For example, they will get more "bang for their buck" when they exchange dollars for euros than they would have just a few months ago.
A stronger dollar creates challenges for some large U.S. Firms that do significant business overseas. The revenues they generate abroad, once translated back into dollars, will result in a reduced return as the dollar strengthens. This can have a negative impact on corporate profits for multi-national firms, which might be reflected in stock prices. Firms that do little or no business overseas generally are in a position to avoid any significant ramifications to earnings due to the stronger dollar. On the other hand, overseas firms that conduct business in the U.S. Benefit from the dollar's strength. This could, in certain cases, create a more favorable environment for selected overseas stocks. However, currency fluctuations are only one factor that might affect the investment potential of a particular company or country. Investors need to be careful not to place too much emphasis on the impact of exchange rates as they assess their investment options.
You might see an impact of the stronger dollar and lower oil prices in your portfolio, but they are only two of many factors that come into play. Any adjustments you make to your own investment strategy should be consistent with your long-term goals, the time you have to invest and your risk tolerance. Consult with a financial advisor before you make any investment decisions.
Scott Serfass, CFPÂ®, CRPCÂ®, CDFA, ChFCÂ®, CLUÂ® is a Financial Advisor with Ameriprise Financial Services, Inc. In Charlotte, NC. His team specializes in fee-based financial planning and asset management strategies. To contact him, visit
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