Marietta Celebrates 15th Anniversary

February 7, 2015 marked the 15th anniversary of the founding of Marietta. Looking back over these years, we are especially grateful for the loyalty and support of our clients. At a gathering of the firm's members to commemorate this anniversary, Managing Partner, John Evans provided an optimistic forecast for global markets and stated that "Marietta is now stronger and has a brighter future than at any time in its history." As we confront the opportunities and challenges of the future, we rededicate ourselves to Marietta's Mission: "to provide the highest quality client service."

To all of our clients, we say thank you!

Marietta attends University of Chicago Booth’s Economic Outlook 2015

On January 15, 2015, Mary Allmon and Jim Rauh accompanied their colleague and current Booth MBA student, Jonathan Smucker, to Chicago and attended the University of Chicago Booth’s Economic Outlook 2015. The presenters were dynamic speakers with impressive resumes:

• Austan Goolsbee, University of Chicago economics professor and economic advisor to the Federal Reserve Bank of New York, and former cabinet member

• Randall Kroszner, University of Chicago economics professor and former Federal Reserve Governor

  

• Carl Tannenbaum, Senior Vice President and Chief Economist at the Northern Trust

The presenters collectively agreed that 2015 would be a year of slightly faster U.S. GDP growth, that European policy makers must act in order to fight deflation, and that India is on the right track. These statements are all consistent with Marietta’s 2015 Outlook. The presenters also agreed that the recent plunge in the price of oil was unexpected, but was a net positive to the economies of oil importers, the US included. They did not necessarily agree on the causes of the drastic price move: Goolsbee cited slowing demand in China while Tannenbaum mentioned geopolitical games being played within OPEC. Tannenbaum echoed a statement similar to Marietta’s Dec. 4 Oil Blog “OilSpills: Winners and Losers” that while US oil production growth will slow in the short term, it is unlikely to be permanently damaged. The speakers also agreed that the Fed was likely to raise interest rates in the second half of the year, with fall being the median prediction.

Oil Spills: Winners and Losers

 

WTI Crude Oil Trailing 6-mo Price Performance." WTI Crude Oil (Jan'15). CNBC, n.d. Web. 05 Dec. 2014.

Summary: Oil prices have plummeted in recent weeks. There are many reasons why the downward pressure in prices is unlikely to stop anytime soon. The oil producers will likely be able to weather the storm, but will have to curb aggressive growth expectations. There are winners as well as losers, and investors should consider adding exposure to companies that benefit from lower gas prices.

                

OPEC made headlines on Thanksgiving Day by refraining from cutting oil production, despite the price of Brent Crude oil declining over 30% year to date and over 25% in the fourth quarter alone. There are various reasons for this drop in prices, most notably rising oil production (especially in North America), decelerating global economic growth, a plateauing of demand for oil in China, and the multi-year trend towards increasing energy efficiency. Increased production and the move towards energy efficiency are long-term trends that will likely continue to keep downward pressure on the oil market.

The investment impact has been dramatic this quarter. The stocks of oil exploration and production, service, and equipment companies have slumped along with the price of oil. Seemingly any company with exposure to the booming oil production conditions in the U.S. has sold off as well. Investors are calculating that lower oil prices will curb growth in the oil producers. While the sharp reaction in oil prices may overshoot to the downside, a prolonged period of lower than $85 per barrel is not out of the question. This will temper the aggressive expansion in oil production in the U.S. but will not severely damage the industry. Existing wells will continue to pump oil profitably, but companies will likely delay or cancel new well projects if oil prices stay low. Many oil companies’ profit expectations are contingent on the creation of new wells and thus will be lowered. Investors should be wary of exposure to the industry for the next several months. Those who want to maintain long-term exposure should look to well-capitalized industry leaders with global assets. The price of oil will fully recover to over $100 per barrel once global growth picks back up, or suppliers cut production levels enough that prices rise.

On the other hand, there are companies that have received a stock price boost from lower oil prices. Companies in industries where fuel is a major cost (such as airlines and trucking) should post better than expected profits. Additionally, lower gas prices act similarly to a tax cut and put dollars directly into consumers’ pockets. This may well spur discretionary spending and make for a strong holiday shopping season for retailers. Investors should consider increasing exposure to companies that benefit from lower oil prices.