Stocks had a very rough start to 2016, with twin declines of nearly 10% in January and February. The rally in oil (up 68% from its low of $26.14) that began on February 11th helped propel the major averages to modest gains by mid-April. Stocks finished the month of April slightly below those highs and have since given up modest ground into the month of May.
The Dow Jones 30 and S&P 500 both reached a new bull market high in mid-May of 2015. Volatility has picked up noticeably the past six months as fears of an economic slowdown in the US added to the realization that China is no longer the global economic engine it was following the Financial Crisis in 2008. So far, the Dow and S&P are down less than 5% from their highs but the shares of smaller companies have suffered more. These smaller companies tend to pay lower dividends or no dividends at all. With interest rates remaining at ultra-low levels, cash dividends have become a more important component for investor returns. So, if the global economy is slowing and the Fed is unlikely to raise interest rates in the next several months, higher-paying dividend stocks are more attractive and thus have held up better than not.
Back to oil, U.S. Energy Information Administration (USEIA) data show that daily global oil production is 1.41 million barrels higher than daily demand. Oil supplies in the US are at an 80- year high and OPEC shows no signs of backing down production. Why have oil prices remained near their recent highs in the mid-$40s? USEIA statistics list Canada producing 3.7 million barrels per day as recently as January. Wildfires in western Canada have devastated a portion of the oil-producing infrastructure in the area and fears of a disruption in supplies have kept oil prices higher than supply statistics would have predicted.
Canadian production is likely to bounce back quickly, but the wildfires serve to remind us that any one country can go offline and oil prices may be higher than predicted by the simple law of supply and demand. Venezuela, Iraq, Libya, Nigeria and other less-stable countries have the potential to throw oil markets into turmoil, at least over the short-run. The good news is that thanks to the shale/fracking revolution, the US can quickly step up production to fill any gap.