Oil Price Surge - Potential Recessionary Catalyst?
- Ryan Seewald
- Mar 9
- 4 min read
It should come as no surprise to clients and investors who have read our recent market insights that we are overly bearish on both risk assets (such as stocks) and the US economy as a whole. Given both historical and current data, we believe that the US economy is on its way towards a recessionary period. Of course, the million-dollar question(s) is when and how to prepare for it? Considering that transparency is a key pillar on which BPW is built, if I could pinpoint the exact moment, I would either be writing this insight piece from my own private island or not writing it at all.
Most people equate the stock market rolling over to a recession beginning, but in reality, recessions tend to build over time, and markets (particularly equity) are usually the last to know. Trying to figure out what the final catalyst that tips the economy into a recession is a losing battle and almost impossible. As we mentioned, recessions tend to build over time, and usually the final straw that breaks the camel’s back is the headline narrative we read. 2001 was the “dot-com bubble”, 2007-2009 was the “global financial crisis”, 2020 was “Covid”, and although each catalyst was much different, they all have extremely similar timing in regard to interest rate policy (meaning where the Federal Reserve stands on the trajectory of interest rates), which is exactly where we currently are today. See our previous insight piece for more info on this here (Rate Cuts & Red Flags: Why History Suggests Trimming Risk Now). The “final catalyst” is usually a sudden shock that catches the market off guard, which leads to the unearthing of all the issues that have been building up behind the scenes. To quote the great Warren Buffett, “Only when the tide goes out do you discover who's been swimming naked.”
One thing that seems to always catch the market off guard — understandably so — is geopolitical risk and the effects it can have on commodities (particularly oil). Sources like the Energy Institute and IEA confirm oil remains the single largest primary energy source but no longer exceeds 30% in share, with fossils overall still roughly 80-86%. This is why oil is so critical: Even at 30%, disruptions (e.g., price spikes, supply issues) can have outsized economic impacts due to its role in transport and industry. It can also have a major impact on financial institutions depending on how their commodities’ portfolios are positioned. For example, being short oil (hoping the price of oil continued to go down) right now is certainly less than ideal.
That said, is this massive surge in oil prices over the past few days the final straw that tips an already fragile economy into the inevitable recession we believe is coming? It certainly could, especially if prices stay elevated for a prolonged period. Something like this could potentially have major ripple effects on the global economy, not just domestically. Will it though? Given I am writing this in my home office and not on my private island, I will answer with “we shall see”. Jokes aside, we believe a recession is coming whether we like it or not. Historical data doesn’t lie, and although with different causes, history always tends to repeat itself.
In regard to portfolio positioning, we continue to believe that reducing risk by lowering equity exposure and putting more cash into either money markets or short-term treasuries (less than 1 year). There is nothing wrong with getting paid 3.5-4% risk-free just to be patient with part of a portfolio. Of course, this recommendation is not a “one-size-fits-all” strategy, but there is nothing wrong with any investor earning close to 4% risk-free while awaiting better opportunities down the road. For clients that have been sitting on a good amount of cash and want to put some money to work, we continue to believe that long-term treasuries offer the best risk/reward profile throughout the entire investment landscape. Historically, they are also a good hedge against the risk of a recessionary period.
For investors who are not clients and are still taking the time to read this, first off, thank you. Second, you should be having a conversation with your advisor about potentially lowering risk in your portfolio, no matter what your age is. There has been a common theme among portfolios we have reviewed of newer clients over the past couple of months, and it’s that most people are taking on way more risk than they should be right now. If during that conversation you are met with generic responses such as “your portfolio is 60/40 (stocks/bonds) and we should just be staying the course,” make sure to dig deeper and ask how and if it is properly prepared for a potential recessionary environment. In our opinion, regardless of age, now is not the time to avoid making changes to your portfolio. We would be more than happy to sit down and walk through your portfolio with you to see if you are properly allocated.
