Oil prices declined around 5 percent this week due largely to the weekly Energy Information Administration (EIA) petroleum report, which showed that crude oil stockpiles remained near an 80-year high in the week ended August 14. Evidently market participants worry that the supply glut could persist for a long time, barring any significant change in the global environment to alter the current oversupply.

Naturally, the energy stocks responded across the board, some of them dramatically. However, we like to focus on the long term. Supplies will decline, as production falls. Average U.S. production has declined in six out of the last 7 weeks, declining 2.7 percent over the stretch. As we have argued, frackers cannot maintain profitability at current oil prices. If prices were to remain depressed it’s really only a matter of time until the production decline accelerates. Wells that have already been completed or now stand near completion can continue to produce even when oil prices collapse, as heavy expenditures were already made, and the impact of reduced drilling activity will take time to manifest in the output.  

The big diversified oil companies, however, will be fine. This is why in recent months we have steered our portfolios more toward the more conservative operators, even if their yields are not extraordinarily high. 

The current environment does demonstrate, for the record, the importance of diversification. At any given point in time, one industry may look excellent; it may even look like the best thing since slight bread. Nevertheless, it is always a good idea, critical in fact, to maintain some well-considered counter balances in your portfolio.

Stocks bounced back in the afternoon in reaction to the release of the minutes from the last Federal Open Market Committee (FOMC) meeting, held in late July. According to the minutes, which summarize discussions during the meeting, committee members felt that conditions for policy firming (i.e., hiking interest rates) had not yet been achieved.

The FOMC will hold its next confab in mid-September, during which time many analysts expect Janet Yellen and company to raise the federal funds rate—the overnight lending rate that acts as the benchmark for key interest rates, such as mortgage rates, in the real economy—for the first time since 2006. According to the notes, “almost all members” of the FOMC want to "see more evidence that economic growth was sufficiently strong and labor markets conditions had firmed enough for them to feel reasonably confident that inflation would return to the Committee’s longer-run objective over the medium term.”

Although the unemployment rate has fallen, the labor participation rate remains at multi-decade lows and the jobs market has seen hardly any wage growth. Since wages provide most Americans with their main source of income, the dearth of wage increases means no income growth, which in turn bodes poorly for increased spending. Consumer spending accounts for roughly 70 percent of U.S. GDP, which will make strong economic growth hard to come by unless American households step up their purchases.

Furthermore, this week’s sharp oil drop also suggest that inflation isn’t imminent, which could give the FOMC more leeway to wait, or perhaps encourage them to hike rates by a smaller increment than they might otherwise plan.

Given the low-interest environment, the generous income offered by our high-yield investments looks all the more enticing in comparison. Despite the pain in the energy sector, especially if you take care to diversify, we think your patience will be rewarded.