Wells Fargo report bleak for Alaska on strong dollar, weak oil

  • Stock markets have been in a slump so far this year after a lackluster 2015, but a Wells Fargo analyst says it is normal volatility after an abnormally smooth rise since the depths of the 2009 recession. The bank’s investment outlook for 2016 does not portend well for Alaska as it advises the dollar will remain strong, which hurts Alaska’s exports, and oil prices will remain weak, which is putting a huge hole in the state budget. Photo/Mark Lennihan/AP

Wells Fargo economists released an investment update for 2016, and little of the news looks pleasant for Alaska.

The report, entitled “Navigating Risk in a Year of Change,” advises investors to shrug off the appearance of market volatility in 2016.

“We started the year very differently than we started the year ever before,” said JoEllen Weatherholt, an Alaska investment strategist with Wells Fargo.

Weatherholt said the market’s recovery from economic doldrums beginning in March 2009 has been abnormally smooth. Market volatility now, she said, only feels intense by comparison.

“We’re back to more normal volatility,” she said. “It feels like super volatility when you haven’t had any in awhile. We are going to continue to have volatility, we’re not going to be in that smooth sailing environment.”

Investors, she said, should calculate their appetite for risk and try not to get sucked into pessimism.

“Quit watching TV and just hang tough,” Weatherholt said.

The volatility, the report says, traces back to several themes. Most crucial for Alaska, commodity prices including oil remain low with little sign of an upswing, and the U.S. dollar’s strength causes problems in export markets.

In terms of Wells Fargo’s report, Alaska more closely resembles the bank’s definition of an “emerging economy”: one dependent on low-value bulk resources without a substantial proportion of 21st century business drivers like technology and internet development. With political unrest and low commodity prices, these emerging economies have a negative outlook.

The dollar’s strength hurts for Alaska as a foreign export producer, notably for the state’s largest foreign export, seafood, and for it’s largest revenue source, oil. Alaska also exports other commodities such as gold, lead and zinc.

In 2015, the dollar’s strength factored into Bristol Bay fishermen — the world’s largest sockeye run — receiving half the average price for their fish.

Wells Fargo doesn’t predict the dollar will weaken anytime soon, though early 2016 saw it beef up less than the previous year as foreign economies strengthen.

“The dollar’s two main supports are stronger economic growth and widening interest-rate differentials across countries,” reads the report. “The U.S. economy has outperformed the Eurozone and Japanese economies since 2014 as the dollar has surged in value against the euro and the yen. The economic-growth gap across these regions should narrow somewhat in 2016.”

Europe is a key export market for Alaska seafood along with Japan and China, but outlooks for their currencies look dim. Political unrest driven by the European refugee crisis contributes to the euro’s weakness, said Mike Serio, Regional Chief Investment Officer for Wells Fargo Private Bank.

The dollar’s strength has been a factor in the price of oil’s decline, colliding with a glut in supply. Global production increased in 2015 from 94.5 million barrels to 95.5 million, with no equivalent increase in demand to raise prices back up.

“The problem is our storage facilities all over the U.S. are just bloated with oil,” said Serio.

Rather than depress supply willingly, oil-producing regions continue to yield. “We’ve got Russia continuing to pump, Saudi Arabia continuing to pump, and Iran continuing to pump,” he said.

Oil prices are good for the U.S. consumer, but there’s been no equivalent buildup in other areas to benefit. Wells Fargo estimates an annual household savings of $92 billion per year. Typically, economists theorize that gas pump savings fuel growth in other sectors, but the U.S. consumer appears to have learned a savings lesson from the Great Recession.

“People are saving 5.5 percent of their income,” said Jon Snare, a regional investment manager. “It’s one of the mysteries in the U.S. that consumers since the crisis have been less willing to go out and spend the money they save.”

For Alaska, this could dampen tourism expectations. Tourism, nearly a third of the state’s private economy, comes from discretionary spending, especially lengthier and more expensive trips to remote locales like Alaska. With that extra money socked away in savings, it may be less likely to be spent on glacier cruises and halibut charters, although the state is forecast to have another strong year of visitors in 2016.

DJ Summers can be reached at daniel.summers@alaskajournal.com.

Updated: 
02/11/2016 - 9:24am

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