Oil Rig Counts
Last week marked the tenth consecutive week where the oil rig count in the US didn’t go up. In fact, it has pulled back. The total number of rigs in the US is now 106 off of its all-time high, but why is that important? We’ve seen an increase in the price of gas at the pump over the summer, and with that rig count continuing to fall, it makes it unlikely that US oil producers will be ramping up production to cause that price to fall. What we want to see happen often is when prices rise, which incentivizes production, which then eventually brings prices down. However, you need rigs to produce more oil. Seeing the pullback in the oil rig count is concerning that we may see gas prices continue to rise or at least stay at elevated levels. We see that flow through directly to the market when you compare consumer discretionary stocks to oil stocks. In the July CPI print, when inflation was at 3%, consumer stocks greatly outperformed energy stocks. Since then, oil prices have skyrocketed above $80 a barrel, and we’ve seen all that gain reverse. Is the market expecting consumers to pick between filling their gas tanks or purchasing discretionary goods? The market expects that consumers will have to choose to fill their gas tanks; therefore, we’re seeing consumer stocks go down. We are watching closely to see how this pullback in oil rigs bleeds through to consumer stocks and how that impacts the markets.
We had some great feedback and conversations with viewers of the vlog last week, specifically tied to markets being historically volatile in September. September is traditionally the worst month for the markets, but every time period is different. We want to cover that intra-year pullbacks in the market are entirely normal and don’t necessarily mean the market will be down after September. So, while technical evidence supports the case for the potential for a longer-term bull market trend, investors should expect some pullbacks along the way. To show this, we share a chart in this episode that compares intra-year price performance and maximum pullbacks for the S&P 500. At a high level, the top row of the chart shows that even years with double-digit gains into August often experience sizable pullbacks over the remainder of the year. On the right of the first row, you can see that going back to 1950, the average pullback of the S&P 500 has been down 8.6%, but the average final return has been up 5.2%. To break down the data further, the quintile ranked the performance of the S&P 500 from December 31 to July 31 for each year going back to 1950. We then analyzed the corresponding average returns in the middle column and maximum pullbacks for the remainder of the year for each quintile group on the far-right column. As always, there are no guarantees; even good years have historically seen pullbacks at times throughout the year, and it is normal for the markets to experience. We use this data to take advantage of market pullbacks when opportunities present themselves.
We got the August employment report a couple of weeks ago, and non-farm payrolls increased by 187,000, beating expectations. The education and health services were up due to schools starting back, as well as leisure and hospitality. We did have a decline in the truck transportation industry because one of the major players there dissolved, but overall, it was a solid report. One of the headlines that you’ll see that may be confusing is that the unemployment rate rose to 3.8% from 3.5%. All that gain in the unemployment rate was due to an increase in the labor force. The labor force is people actively looking for jobs or working. There were 736,000 more people who entered the labor force this past month. That’s a big deal because, since Covid, we’ve lacked in the labor force participation. We’ve had many people, for whatever reason, leave the workforce. It’s nice that this is our highest labor force participation since Covid. If you look back at what we’ve seen so far, year to date, one interesting point of the job market is that small businesses, which are businesses with under 500 employees, have made up 100% of the job growth year to date. Big businesses are pulling back from their employment, while small businesses are adding to it. That’s very interesting, but we’re seeing small business hiring slow down. We want to keep an eye on that because the IRS is starting to pull back on the business tax refunds they’re giving out, specifically for small businesses. They, of course, have the employee retention tax credit this year, but now the IRS is starting to take these claims more seriously. They are taking further steps to detect falsified claims to try and ensure everything’s legit to cut back on what they’re given out as they see this healthy job market that’s led us throughout the year. Business tax refunds were way up, and now they’ve returned to a more normalized level. It will be interesting to see how the job market continues from here.
Fi Plan Partners is an independent investment firm in Birmingham, AL, with a team of professionals serving clients across the nation through financial planning, wealth management and business consulting. The team at Fi Plan Partners creates strategies in the best interest of their clients using fee based investing.
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