Professor: Low oil prices boost stock market

Low oil prices are actually helping boost the U.S. stock market and the retail, manufacturing and airline industries, while natural gas is the bright spot in the energy industry, Tulane business professor Peter Ricchiuti said.
Ricchiuti was the guest speaker for the Atchafalaya Chapter of the American Petroleum Institute’s meeting Tuesday at the Petroleum Club of Morgan City.
Ricchiuti is a professor at Tulane University’s A.B. Freeman School of Business. He is also director of research at Burkenroad Reports, a program he founded in 1993 at Tulane.
In this program, groups of students meet with company officials from one of 40 companies and then publish a 30-page investment research report. Ricchiuti chooses companies that “Wall Street hasn’t heard much about,” he said.
The recent drop in oil prices is equivalent to about a $200 billion tax cut to U.S. consumers, Ricchiuti said. Low oil prices are stimulating the economy, which has been good for retail sales. Stocks are “pretty fully valued” right now, Ricchiuti said.
Conrad Industries in Morgan City, one of Ricchiuti’s favorite companies to follow, has diversified the vessels it builds beyond the oil and gas industry and has been “somewhat rewarded in the market,” he said.
There is one sector of the energy industry that is doing well, and that’s natural gas, he said. The demand for natural gas continues to grow as a fuel for generating electricity. Natural gas now generates 31 percent of electricity in the country, up from the 10 percent of electricity natural gas generated 15 years ago, he said.
“Natural gas has surpassed coal in generating electricity,” Ricchiuti said. If the U.S. can start exporting natural gas, it will be a “game changer.”
Saudi Arabia is taking advantage of the low U.S. oil prices. Saudi Arabia has one asset and business, the oil and gas industry. The country wants to sell “every drop they own” to use those revenues to diversify its economy, he said.
“And lowering oil prices, increasing volatility is doing just that. It’s enabling them to get their market back,” Ricchiuti said.
Though the oilfield has had a tough 12 to 15 months in the U.S., corporate profits are generally at record levels, he said.
Since World War II, corporate profits are up 100-fold, and stock prices have risen 90-fold. Corporate earnings are by far the most important determining factor for stock prices, he said.
The economy adding 200,000 new jobs each month, consumer confidence being at an 11-year high, bank loans steadily rising and the unemployment rate being at an eight-year low are all contributing to the rise in the stock market, Ricchiuti said.
The Federal Reserve will probably raise interest rates soon, but Ricchiuti hopes the Fed does so gradually.
There isn’t any way around raising interest rates, and the market will probably benefit from an increase in interest rates, he said.
U.S. business leaders have to find a way to solve “job skills match” problem the nation is facing. Roughly 5.8 million job openings exist right now in the country, he said.
“We’ve got a lot of people unemployed and a lot of jobs opening. And something’s got to be done in there,” he said.
The middle class hasn’t spent as much in this economic recovery as they have in previous recoveries, one reason the U.S. economy has only grown about 2.5 percent per year, Ricchiuti said.
Since 1979, the U.S. gross domestic product has grown from $8 trillion to $17 trillion. But, in 1979, the top 1 percent of the population had 10 percent of the nation’s income, while, today, the top 1 percent owns 20 percent of the country’s income and controls 48 percent of the wealth, he said.
“That’s what’s bugging and scaring the middle class and why they’re not spending,” Ricchiuti said.
The U.S. is in the “late middle innings” of the current economic recovery. The last three economic recoveries lasted about 90 months each, and this recovery is in the 78th month, he said.
The biggest economic growth possibility for the U.S. is in the form of exports, Ricchiuti said.
“We’ve developed these middle class economies all over the world with an insatiable appetite for U.S. goods,” he said.