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Investing: Making the oil pump work for you

John Waggoner
USA TODAY

Any big change in the economic environment affects the stock market like a seesaw: Some things go up, some things go down. It's all good fun until little Billy Jones winds up on top of the water tower.

The sudden plunge in oil prices is the most recent example. Nearby futures on a gallon of light, sweet crude — the kind produced in the USA — were $79 a barrel the week of June 13, 2014. They are currently about $56, a 29% decline.

A fire burns aboard the mobile offshore oil drilling unit Deepwater Horizon in the Gulf of Mexico on April 22, 2010.

On the way up: consumer spending, as drivers pocket the savings on filling their tanks. On the way down: jobs in the oil industry. That's just the start of the ripple effect from oil's rapid descent. Not surprisingly, some energy funds have been better at handling the oil price decline than others.

The Federal Reserve's Beige Book, which looks at financial conditions in the 12 Fed districts, noted, "Oil and gas producers in the Cleveland, Atlanta and Dallas Districts anticipate cuts in 2015 capital expenditures. Layoffs were reported in the Cleveland, Atlanta and Kansas City Districts."

Among those laying off workers: Haliburton, which says it has cut 10% of its workforce, or about 9,000 globally, because of the decline in oil prices. Baker Hughes says it will send 10,000 workers packing, and Schlumberger says it will cut 11,000 jobs. All told, planned oil industry layoffs could hit 100,000, even though oil prices have recovered from their most recent low of about $39 a barrel.

The companies that have been hit hardest by the decline in oil are those that seek out new sources of oil and those that supply those companies. Energy companies in general have fallen 12.6% since oil's peak in June 2014, according to FactSet.

Hardest hit were already troubled E&P companies, such as oil rig maker TransOcean (ticker: RIG), still reeling from the Gulf of Mexico oil spill five years earlier, down 62%. Apache (APA), one of the highest-quality E&P companies, has fallen 30% since June 2014. More diversified companies, such as ExxonMobil (XOM), have suffered less: The company's stock is down 14.8%, including reinvested dividends.

Refiners have actually fared reasonably well, because oil is a cost to them, and the prices of refined products, such as gas and jet fuel, tend to fall much more slowly than the cost of oil. Valero Energy (VLO), for example, has gained 10.4%. Marathon Petroleum (MRO) is up 18.2%, and Tesoro (TSO) has soared 54.9%.

A customer fills up at a gas pump Sept. 27, 2013, in Montpelier, Vt.

Even though many oil companies — aside from refiners — have fared poorly in the oil price decline, many American consumers have fared well. Today's national average of $2.49 per gallon is about $1.18 per gallon cheaper than a year ago, according to AAA.

AAA estimates that U.S. households have spent an average of about $335 less on gasoline this year, compared with the same period in 2014. Today's national average of $2.49 per gallon is about $1.18 per gallon cheaper than a year ago.

Most Americans have seen their wages, after inflation, decline over the past few years, so any savings is a net positive, says John Lonski, team managing director of the economics group at Moody's Analytics. "Still the lift may not be as great as what occurred in response to earlier deep declines by oil prices owing to a weakened middle class both in terms of wealth and income," he says.

Individuals may be using their savings at the pump to pay down credit cards, or at least use them less frequently. But the evidence from stock returns indicates they are also spending that money. Consumer discretionary stocks — that is, stocks of companies that benefit when people have more money to spend — have gained an average 20.2% since June 2014, FactSet says. Retailers that cater to the middle class have soared:

  • Lowe's (LOW), up 60.8%
  • CarMax (KMX), up 60.3%
  • Hanesbrands (HBI), up 60%.

Among companies whose stocks have soared 40% or more are Kohl's (KSS, 45.6%), Home Depot (HD, 44.7%) and Target (TGT 42.1%). Interestingly, high-end retailers have suffered. Fossil Group (FOSL) has fallen 22.5%, Tiffany's (TIF) down 14.1% and Ralph Lauren (RL) has tumbled 11.2%.

The decline in oil prices has had other side effects. For example, energy makes up a substantial portion of the consumer price index, which has declined 0.1% the past 12 months, according to the Bureau of Labor Statistics.

Low inflation expectations mean low Treasury yields, Lonski notes. Low Treasury yields, in turn, should mean continued low mortgage rates — which is good for the housing market. "The latest rebound by home sales owes much to the return of a sub-4% 30-year mortgage yield," Lonski says.

Low oil prices also mean lower stock prices for many emerging markets, which rely on oil exports.

Oil price and gasoline prices have risen substantially since their most recent lows. "Consumers today are paying the highest gas prices of the year, with the national average poised to climb above $3.50 per gallon for the first time in more than four months (since Dec. 17)," AAA spokesman Michael Green says. Average U.S. gas prices have increased 10 cents per gallon over the past nine days.

A few funds have done well surfing the energy waves. Tortoise Select Opportunity (TOPCX), has gained 7.2% this year, according to Morningstar, the Chicago investment trackers. The average equity energy fund has lost 1.2%. Calvert Global Energy Solutions Fund (CGAEX), an alternative energy fund, is in second place for the year, with a 6.3% gain.

Among the larger energy funds to show a gain this year: Waddell & Reed Energy (WEGAX), up 2.1%, and Fidelity Select Energy Portfolio (FSENX), up 1.2%.

Given the enormous amounts of oil in storage — nearing an all-time record — and the endless pumping by Saudi Arabia, it's hard to make a case for soaring oil prices anytime soon. The big question will be whether the benefits of lower fuel prices will offset the loss of jobs in the energy sector.

Most investors probably have enough oil in their portfolio: The Standard and Poor's 500 stock index has about 8% of its assets in energy. If you were to top up the tank, the funds above would make reasonable fuel. (You could also use an index fund, such as the Energy Select SPDR ETF (XLE)). But a better bet on lower oil prices might be on consumer discretionary stocks, which seem to be on the rising end of the seesaw these days.

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