Oil Prices May Have Positive Impact on Equities

by Jon Markman | November 12, 2013 4:45 pm

Oil Prices May Have Positive Impact on Equities

The most remarkable and pervasively important development in markets over the past two months has not been expectations for tapering or the government shutdown. It’s been the sharp decline in the price of gasoline[1], which in many ways is the lifeblood of western economies. There are a lot of factors that have led to plunge in prices back to early 2011 levels, but the largest are the decline in the cost of feedstock, i.e. crude oil, amid the huge increase in supply from the rapid development of shale fields in North Dakota, Pennsylvania and Texas

GASO1111 Oil Prices May Have Positive Impact on Equities

Bespoke Investment Group analysts report that since the start of September, the national average price for a gallon of gasoline has been flat or down on all but two out of 71 calendar days! Over that period, the national price has declined more than 11% from $3.594 down to $3.186. In the chart above, you can see the same idea via the price of unleaded gasoline spot prices.

Bespoke notes that the nearly 12% drop represents only the fourth period during the bull market in equities (since 2009) in which gasoline prices have dropped more than 10% over a 100-day period. So naturally we want to know what kind of impact these drops in prices at the pump will have on the stock market going forward.

The answer: A very positive and lasting effect.

Bespoke broke down the performance of the S&P 500 in one, three, and six month spans after each of the four gasoline price drops since 2009. Intuitively, you would think it would have a positive effect, but what’s interesting is how strong and positive the relationship is.

In every one of the four periods, the S&P 500 was higher one, three, and six months later. And for all three of those time frames, Bespoke reports, the average returns were considerably greater than the average S&P 500 return during the current bull market. Clearly, stocks have done well not just during the dips, but afterwards as well.

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Sector returns have also been nearly as consistent. Four of the 10 main sectors were up in every one, three and six-month period following the drop in prices. The remaining sectors were also higher, but suffered a slight decline in two periods (mostly in the summer of 2012). While big-caps in the major market benchmarks have been very strong, the small caps of the Russell 2000 have fared even better. The leaders in both market cap cohorts were transports, materials producers, financials, industrials and consumer discretionary (i.e. retailers and home builders). Lagging, but still positive, were telecom, staples and utilities. 

This is a very strong study and will help guide us going forward. Lower fuel prices go straight to the bottom line for companies in the form of excess earnings and extra cash flow to pay for plant expansion, and also to consumers’ pockets for use on new apparel, cars, gadgets and homes. 


Endnotes:
  1. decline in the price of gasoline: http://investorplace.com/2013/09/gas-prices-map/#.UoKWWyf-L08

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