If you're selling stocks because of oil, the worst is probably over

If you’re selling stocks because of the negative impact the oil crash will have on the economy, the worst is probably over.

Just short of calling a bottom in oil, Deutsche Bank’s Torsten Sløk argued in a client note Thursday that the impact of the crash on the economy cannot get much worse than its been over the last year.

As we recently noted, it’s unlikely that anyone would give away oil for free.

And since oil is now about $70 cheaper per barrel from the top, in this strictly nominal sense, the worst of the oil crash is over, according to Sløk.

But Sløk goes further to say that the negative impact on the economy — which is what has some investors spooked — will probably be felt for the next two quarters. And then that will be all.

And like the price of oil, Sløk doesn’t see the amount of investment going into oil falling to 0% of capital spending in the economy.

Here’s Sløk:

The bottom line is that the US stock market is overly worried about a risk that the consensus doesn’t expect (a hard landing in China) and the stock market mistakenly believes that lower energy prices is bad news for the economy. In my view, the decline we have seen in US equities over the past two weeks is a buying opportunity similar to what we saw in September […]

Combined with the positive effects of lower energy prices on the rest of the economy I think equities, credit, and rates should be paying more attention to the fact that average nonfarm payrolls in October, November, and December was 284,000.

In other words, if all these bearish stories we are telling each other in markets about energy and the dollar and wider credit spreads and China are true, why are companies still hiring almost 300,000 workers every month?

In other words, the stock market is not the economy, and if you’re selling stocks over how oil will drag down the economy the worst is probably “baked into the cake,” as the old investment adage goes.

Energy’s share of capital expenditure — which infers the sector’s contribution to economic growth — has plunged 5% in the past 12 months, and it would be “unprecedented” that it would fall to zero, Sløk wrote.

Additionally, in a note on Wednesday, Sløk had argued that the other big dampener of sentiment recently — China — is projected to grow by 6.5% this year and 6.3% in 2017, which isn’t exactly a so-called hard landing.

And so while certain financial market conditions might be encouraging investors to sell, and worries about the fundamental strength of the economy are probably overblown given the magnitude of the drop in financial markets we’ve already seen this year.

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