Despite the horrendous ugliness in the oil market, contrarians have undoubtedly eyeballed Exxon Mobil (NYSE:XOM) as a potential recovery play. First, at the time of writing price, you’d have to go back to early 2004 to find XOM selling for so cheap. Second, Exxon Mobil stock is still a relevant blue-chip investment. At some point, you would expect the economy to gain traction, bolstering XOM along with rivals such as Chevron (NYSE:CVX) and ConocoPhillips (NYSE:COP).
But if you had that inkling to speculate on big oil, you may want to wait a while longer. If this market represents a bellwether for the economy – and in many ways, oil is where the rubber meets the road – then exercising caution now can save you significant pain later.
As I’ve mentioned in prior articles, one of the greatest challenges facing Exxon Mobil stock is that the underlying company has very few revenue-generating options. For instance, earlier fears about XOM centered on the oil price war between Saudi Arabia and Russia. But without global demand, oil production could go to zero and it wouldn’t make a difference.
When prices dipped below zero, it proved this point. People would rather pay money to not take delivery of oil, a completely unfathomable paradigm shift a few months ago.
Therefore, the risk in buying Exxon Mobil stock is the assumption that one month’s time was enough to resolve this demand crisis. It wasn’t. That evidence has come in the form of the novel coronavirus stimulus checks.
Designed to stimulate spending, the $1,200 checks to each American taxpayer has largely failed. And in that case, XOM has a long road ahead.
Exxon Mobil Stock May Not Normalize for Years
As I write this, news just came in that the House of Representatives narrowly passed a second coronavirus relief package, this time with $3 trillion price tag. As USA Today noted, many Democrats conspicuously voted against the bill, demonstrating division within the liberal ranks.
I’m all for helping the American people and small businesses. But in retrospect, the first round of relief failed to spark much economic activity, outside of a few sectors. Therefore, it’s unlikely that another round of cash influxes will do anything. On a broader level, this would leave Exxon Mobil stock in a long-term quandary.
Here’s why I say this. When Americans first received their stimulus checks, most of them immediately spent it on food and groceries. Other spending was directed toward essentials, which admittedly involved buying gasoline. But a Cowen survey indicated that 31% of survey respondents stated that they intended to save their stimulus. A CivicScience survey revealed that 40% of Americans are stocking their funds into their savings account.
To no one’s surprise, the coronavirus has created an atmosphere of trepidation and uncertainty. Thus, many households are doing the smart, logical thing and saving their checks for a rainy day.
What you won’t find with much frequency, though, is people using their stimulus checks to help put up a down payment for a major purchase, such as a car or a house. Nor will you find people buying plane tickets and going on vacation.
As you know, the airliners have been utterly devastated and that demand may not return to normal levels for years. If money from the government isn’t enough to stimulate literal economic movement, then it stands to reason that Exxon Mobil stock is more vulnerable than you might have thought.
No Free Lunches
Everyone is familiar with the term, there’s no such thing as a free lunch. Apparently, this sentiment also applies to monetary policy.
Although the federal government has done everything in its power to reinvigorate the economy through inflation (i.e. consumption), this grand experiment has so far been a failure. With freshly minted dollars in the bank, Americans have adopted a very conservative mindset.
The point deserves to be repeated. We are living in the fantastical scenario that former Federal Reserve Chair Ben Bernanke once painted (though the concept originally came from Milton Friedman), that of dumping money from a helicopter to stave off deflation.
But this “free” money has failed to spark the oil markets. Even the funds directed toward gasoline won’t mean much overall because of the 20.5 million people who are unemployed. Therefore, Exxon Mobil stock is a wait-and-see game, which is a game that I’m not willing to play.
A former senior business analyst for Sony Electronics, Josh Enomoto has helped broker major contracts with Fortune Global 500 companies. Over the past several years, he has delivered unique, critical insights for the investment markets, as well as various other industries including legal, construction management, and healthcare. As of this writing, he did not hold a position in any of the aforementioned securities.