Sell side commentators are busy assuring us that plunging energy prices are positive for the economy. But then they say that about everything…For a more useful overview of the good, bad and ugly of falling oil prices see Gary Shilling’s, Who gets hurt when oil falls.
The U.S. stock market, while pointing up now, may yet have a negative response to declining energy costs, suggesting that the financial risks from falling oil prices may outweigh the benefits to consumers.
If a full-blown global financial crisis unfolds, along with an accompanying worldwide recession, investment strategy will no doubt shift from the current “risk on” stance to “risk off.” In that scenario, you would expect to see a rush into the safety of Treasury bonds and the U.S. dollar and a stampede out of commodities and stocks globally.
Interestingly, most of this is already in tow. Treasuries are rallying as Americans and foreigners pour in; yields recently hit 2014 lows. The dollar has been robust against the deliberately devalued yen and euro, as well as the currencies of commodity exporters Australia, New Zealand, Canada and Russia. And commodity prices, from oil to copper to sugar, are falling.
Only stocks remain to turn down decisively, and even that could change if oil prices keep sinking.