Yesterday, I was catching up with a friend and fellow youth soccer coach. He happens to be a public stock research analyst. Although we were talking soccer, not business, we ended our conversation musing over the stock market’s Monday decline, which now appears to have extended into Tuesday.
His read; it’s all about oil. For those that haven’t been paying attention, oil prices have dropped precipitously. There are a number of factors at play including weak demand in emerging nations, and the emergence of alternative fuels. But for the most part, this issue is oversupply. Did you know that the United States is now the World’s largest oil producer? Surprising right!
In most cases, a decline in oil prices (particularly a supply led decline), which translates into lower prices at the pump is a boon to consumer demand and therefore a bullish macroeconomic signal. A consumer that spends less money on gas has more money to spend on other things. Seems like a very positive direct effect. But that is not how the stock market is reading it.
What my stock research analyst friend said is that the stock market is reading weak oil prices as a negative. The reason is that many emerging economies like Russia, Brazil and many other are heavily dependent on oil. Demand coming from these countries is expected to decline because of lower oil inflows. The same may occur in Texas, whose economy is also partly dependent on oil. The market is essentially saying that the negative effect on demand in oil dependent countries will more than offset the positive effect on demand from countries like the United States, whose consumers will benefit from lower oil prices. This secondary effect is the strategic effect.
I’m reminded that every action has a direct effect and one or more downstream strategic effects. Markets and business are like chess. Be mindful, not just of the strategic effects of your actions/decisions, but also the strategic effects. Each decision reverberates forward, sometimes in counter-intuitive ways.