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What high energy prices mean for markets – Forbes Advisor

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Recent economic data is warning signals, making investors more than a little nervous. One of the most worrying large red flashing indicators is energy prices.

Crude oil, natural gas and coal prices have been on the rise for much of 2021 as the global economic recovery from Covid-19 is hit directly by supply chain disruptions and higher inflation.

Take oil, for example. West Texas Intermediate (WTI) crude futures, the US benchmark for oil prices, climbed above $ 80 per barrel in October, the highest level since 2014. A similar trend is occurring with the prices of Brent crude, the international benchmark, as well as natural gas. and coal.

For analysts and economists, soaring energy prices can be a worrying sign. All economies need energy to function, so supply shortages and high prices could hamper growth, even as countries begin to see a sense of post-pandemic normalcy. It could get worse if there is a particularly cold winter.

Energy market turbulence abounds

Concerns abound in many of the world’s largest economies.

In the UK, gas stations have no fuel to sell in part because there are not enough drivers available to ship products to the pump. By the end of September, up to two-thirds of retail gas stations were completely out of fuel. The shortages sparked panic buying, with long queues echoing the oil crises of the 1970s.

Meanwhile, UK natural gas supplies are dangerously low and unstable weather conditions have caused electricity production from wind to exceed expectations.

With Russia not sending as much natural gas as it can to Europe, hoping to pressure Germany to approve a larger pipeline, the UK had to enter a market sparkling wine to buy supplies elsewhere. And the rest of Europe is facing problems similar to those seen in the UK

Europe is not alone in this power struggle, however. China, the world’s second-largest economy, is also suffering from rising energy prices. The authorities recently demanded a dramatic increase in coal production.

Like Europe, China had started to move away from more polluting energy sources like coal in an effort to reduce greenhouse gas emissions. This goal has come up against the harsh reality that Chinese provinces have started to ration energy. Coal prices have increased as a result, world prices have increased by over 230% in the past six months.

In this context, one would think that the energy-rich countries of the Organization of the Petroleum Exporting Countries (OPEC) would pump out as much supply as they could. This does not appear to be the case, however. Despite arguments put forward by the Biden administration, OPEC recently said it would not significantly increase supply.

International energy crisis could hurt the United States

There is little need to remind American consumers that energy prices are skyrocketing. A gallon of gasoline was priced at $ 3.27 in September 2021, down from $ 2.19 a year earlier. Even when you go back two years, before the pandemic disrupted the market, current prices are almost 25% higher.

Volatile energy prices are essentially a tax on all Americans, regardless of how much income they earn. Add higher bills to cool homes during the summer, then higher prices to warm them up as winter approaches, and it’s not hard to see why consumers are pessimistic about their personal finances. .

These increases coincided with economists lowering their estimates of economic growth this year. In June, for example, the Federal Reserve estimated that gross domestic product (GDP) would increase by 7% in 2021, adjusting for inflation. That estimate fell to 5.9% in September, reflecting expectations from the Conference Board, a research group on nonprofit businesses.

With inflation higher than expected and lingering longer, and economic growth slowing, some fear the economy will experience something similar to the miserable stagflation of the late 1970s, when prices soared, despite increasing job losses and slowing economic expansion. While the news isn’t that bad, experts seem to agree that still high energy prices will slow global growth.

How should investors react to an energy crisis?

For now, stock market investors remain calm. Stocks fell widely in September, as they usually do. But the markets retraced their losses in October.

Of course, the story is not limited to the high cost of fuels. The debt ceiling fiasco has done little to attract investor appetite as China faces the prospect of unwinding a real estate debt bubble that could prove costly to creditors.

Employers are not hiring workers at planned rates, and supply chain issues continue to drive shortages and higher prices across the country. In a recent speech, Atlanta Federal Reserve Chairman Raphael Bostic said that despite earlier claims by Fed officials, the forces pushing inflation up are not transitory.

Above all of this looms the Federal Reserve’s impending decision to buy fewer bonds, a process known as tapering, which would reduce the support the economy receives from the Fed.

Robert Gilliland, chief executive of Concenture Wealth Management, believes investors should expect higher volatility in the near term as the economy continues to rebound. This means retirees need to make sure they have enough cash to cover their expenses over the next year to 18 months.

Still, he’s optimistic that a good quarter of corporate earnings will go a long way to stem the pessimism.

In September, we become headline-focused, said Gilliland. It has nothing to do with the earnings. Profits will likely have good numbers coming from companies in different industries.

Even though these earnings are disappointing, long-term investors in portfolios that match their goals don’t have to worry if the market fluctuates to end the year. A diversified portfolio is designed to handle the ups and downs of the market.

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