Stay Out of the Echo Chamber Focusing on the Market Fundamentals

In the middle of the recent stock market correction, I read an article emblazoned on the front page of the New York Times reporting on the market volatility and “fear.”  The introductory line read, “The party is over.” [i]  This was the classic contrarian sign that we were forming an interim bottom in the correction.  As market strategist Dave Rosenberg recently wrote, “Corrections are part and parcel of the investment process, they come and go, and it is imperative to take a deep breath and realize that what is most important for building wealth is not “timing” the market, but rather “time in” the market.” [ii]  As the market was turning lower, the technical factors (as well as the negative sentiment) continued to build, which added downward pressure.  Nevertheless, fundamentals and valuation remained largely intact. 


For one example, look no further than the energy sector and energy infrastructure MLPs, specifically.  With a changing backdrop of global supply and demand dynamics, the price of a barrel of West Texas Intermediate crude oil has dropped by over 20% since the early summer months.  Although some global oil producers (i.e. select OPEC producing nations) may eventually need to curtail some production due to budgetary pressures, several of the large U.S. producers operate with breakeven rates that are significantly lower than the current spot price.  The executive director of the International Energy Agency recently stated that “only a tiny minority of shale oil production would be affected by the slump in prices to near-four-year lows.” [iii]  (It’s also worth noting that lower energy prices may help support the broader U.S. economy, as input costs decline and consumers pay less at the gas pump.) 

In addition to a sell-off in the crude oil producers, even energy infrastructure MLPs faced significant downward pressure despite having largely fee-based revenue models and little direct commodity price exposure to crude oil.  In fact, in a lower priced commodity environment, some infrastructure MLPs stand to benefit from increased volumes, as lower prices create additional demand.  In short, the infrastructure MLP fundamentals are strong, and may even be more attractive as we tread through the current low interest rate environment.  Fundamentals may be hard to focus on when you are standing in an endless “echo chamber of negativity,” as one analyst put it. [iv]  However, over the course of a long investment period, these market dislocations serve as an opportunity when we are headed in an upward trend. 

Byron Wien reinforced this sentiment in a recent interview with Welling on Wall Street.  All of the signs that would typically predict a potential bear market are non-existent, whether it be “an inverted yield curve, an ongoing decline in industrial production,” or even rising inflation, among many other data points. [v]  Despite some of the global economic slowdown, the U.S. continues to march on in its recovery.  More importantly, he adds that although “we might be unfavorably surprised by the pace of the recovery, we might be favorably surprised by the duration of it.” [vi]  Furthermore, the 5-year breakeven rates reveal lowering inflation, which does not suggest a monetary tightening environment is on the short-term horizon.  These are all positive factors for U.S. dividend paying equities and energy infrastructure MLPs.  Although there may continue to be some volatility in the market, the upward trend appears to be clear.  As Warren Buffett said, “The stock market is designed to transfer money from the active to the patient.”


The Rosenau Group is a team of investment professionals registered with HighTower Securities, LLC, member FINRA, MSRB and SIPC & HighTower Advisors, LLC.  This document was created for informational purposes only; the opinions expressed are solely those of the author, and do not represent those of HighTower or its affiliates.  This is not an offer to buy or sell securities, and HighTower shall not in any way be liable for claims related to this writing, and makes no expressed or implied representations or warranties as to its accuracy or completeness.                                                                                                                                         

Pamela Rosenau, Managing Director and Chief Equity Market Strategist at HighTower and Chief Investment Officer at the Rosenau Group has 30 years of experience in the financial industry.  Ms. Rosenau was recently ranked #76 in Barron’s 2014 Top 100 Independent Advisors and ranked #15 in Barron's 2014 Top 100 Women Financial Advisors. She was also chosen for Barron's 2014 Top 1,200 Advisors list, ranking #52 out of all financial advisors in California. Ms. Rosenau holds series 7, 63, and 65 licenses.


[i] Peter Eavis and Landon Thomas Jr. “Steep Sell-Off Spreads.” New York Times, October 15, 2014.

[ii] David Rosenberg. Gluskinsheff. Breakfast with Dave. October 15, 2014.

[iii] Nancy Lazar. Cornerstone Macro. Economic Research. October 15, 2014.

[iv] JP Morgan. Commentary. October 13, 2014.

[v] Byron Wien. Welling on Wall Street. It’s Just a Correction, Folks. October 13, 2014.

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