Will the recovery slip on rising oil prices?

Doug Horn

With the unrest in oil producing countries in the Middle East such as Libya, the price of oil recently was back to the triple digit range. Adding to economic uncertainty, the devastating earthquake in Japan may take the focus away from oil prices, although this may be momentary. As I am writing this, the full impact of the earthquake and tsunami and long-term influence on the Japanese and world’s economy is still unknown. But, in the short run, oil prices have moderated.

Will this overall rise in oil prices and the price consumers are paying at the pump slow our economic recovery? For just such occasions, I am willing to pull out my crystal ball from the vault and see what may lie ahead. Sadly, the pictures I am seeing in my crystal ball are not that clear. Wait, a picture is coming into focus, and the market is going through a slight correction. No, it is heading sideways, consolidating. No, actually it is gaining ground on anticipation legislative steps will be taken.

Actually, the market will do what it has always done. It will go down when many do not expect it, then as the sentiment grows more negative, all of a sudden the markets will begin gaining again. The only difference in what happens in future markets as compared to the past will be the duration of each movement in the market. This is not to say it is okay to ignore current events and thus not adjust investment allocations based upon short and mid-term expectations.

To invest in the markets, each investor should have the understanding their accounts will drop in value from time-to-time, often without fair warning. If there is a reliance on the investments for income, then allocating a portion to conservative options is desirable. A potentially better option though would be to segregate a small portion of the investments into a separate account. By maintaining a second but conservatively allocated portfolio, in the event of another severe market correction the market’s impact would be less on this portfolio leaving it available to become the income source for a period of time. This would permit the primary account to be managed in such a way to take advantage of dips in investment prices and potentially allow other holdings that were not sold to partially if not fully recover.

The unrest in the Middle East may have been the catalyst for the current correction, since the S&P 500 has moved up over 27 percent since last August. If the unrest dissipates rather than spread to other nations like Saudi Arabia, then this move in the markets will be a buying opportunity as the U.S. economy continues to claw its way through this recovery. Any time uncertainty surrounds a commodity, nation, or other iconic symbol, speculation will happen. In this case since oil trades daily, the impact is felt and seen immediately. But, the increase in price by speculators can evaporate just as quickly when the cause of the speculation goes away.

Sadly, the devastation in Japan also means spending will occur in all areas of their economy and others as they rebuild, most likely totaling in the billions. This will create local but also international demand, just like Katrina’s impact in 2005.

Just remember, permitting current news to substantially impact a portfolio’s allocation may adversely influence its long-term growth ability.

For assistance with portfolio allocations, insurance, estate planning, or investment management contact me at Quality Financial Concepts or one of the other Certified Financial Planners in our area. To continue a personal quest for education, you can also view our learning center on our website, www.goqfc.com. There you will find articles on a variety of topics, on-line seminars, calculators, as well as a host of other free tools.

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