Sliding crude oil prices are giving consumers relief at the pump, which is bound to provide a fillip for consumer spending. But whether that is good news for the stock market is another story.
Crude oil futures have been demolished over the last four months, falling some 17 percent from their June highs, and settling at a 17-month low on Friday. And as oil prices have fallen, consumer gasoline prices have dropped to a nationwide average of $3.32 a gallon, the lowest since February, according to AAA. The motor club group also notes that in 26 states, gas can be found for cheaper than $3.00 per gallon. And AAA predicts that gas prices will continue to fall in October.
Given the massive role gasoline plays in American life (in a February 2013 report, the U.S. Energy Information Administration estimated that Americans spend about 4 percent of their pre-tax income on gasoline) the drop in gas prices is naturally expected to have an impact on consumer spending.
"The per capita usage is about 400 gallons of gas used per year for each person in this country. That's a lot of money going back into the economy when you have cheaper gas," said Jim Iuorio of TJM Institutional Services.
"Gasoline is down noticeably, and I know it's noticeable, because I noticed it when I filled up my car," remarked Jonathan Golub, chief U.S. market strategist at RBC Capital Markets. "That is a big deal, and it immediately hits consumption."
But that doesn't necessarily mean it's time to buy stocks. Golub notes that between oil stocks, the materials sector, and industrial and utilities names in commodity-related businesses, "17 or 18 percent of the S&P is a loser with falling oil prices."
From a market perspective, then, the benefit to the consumer is "100 percent offset" by losses in oil-exposed names, making it a mere "rotation issue." In other words, the market as a whole shouldn't be expected to rise or sink on a big drop in energy prices, but those oily names should sink, and consumer-exposed names should get a boost.
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