A key American fuel gauge is on the fritz, and no one seems sure how to fix it — is cheap gas helping the economy or isn’t it?
The correlation between oil prices and the stock market has reached a level only rarely ever seen — if oil tanks, it takes stocks right down with it. It’s the tightest correlation in 26 years, according to the Wall Street Journal. Meanwhile, economists are puzzled that the “lower for longer” gas prices have not contributed more to consumer spending.
Wal-Mart is closing stores, and Amazon reported holiday sales that, while good, were not as good as expected, and share of the country’s leading online retailer cratered. Meanwhile, the consumer sentiment report released Friday came in slightly below expectations and declined from the previous reading.
For investors who buy the bull argument that cheap gas will be a tailwind for the U.S. market, the lack of a clear winner in the “cheap gas” debate provides little comfort. In laying out a bull case this week for the economy amid the market volatility and worst month for the stocks since 2009, Liz Ann Sonders, chief investment strategist at Charles Schwab, cited the cheap gas boost to the American consumer.
Yet in looking at the 10 sectors of the S&P 500 over two key recent periods in the oil collapse — when WTI crude first dipped below $65 and then first dipped below $40 through this week — only one sector of the stock market has managed to stay positive to any notable degree: telecom (consumer staples has posted positive, but basically flat performance since August 2015), according to S&P Capital IQ data. The sector that is causing all the pain is doing better than the rest of the sectors this year: In January, large-cap energy outperformed theS&P 500 as a whole.
The answer to the “cheap gas boost” dilemma may be a key to an investor’s overall view of the direction in which the U.S. economy is heading. The latest GDP figure released Friday showed growth slowing to 0.7 percent.
Some cheap gas bulls are frustrated that they’re view is no longer the prevailing sentiment.
John Kilduff, Again Capital partner and CNBC contributor, said he is in “disbelief” that low oil prices could be considered negative for the US economy.
“Upwards of 80 percent of the U.S. economy is consumer-based and U.S. drivers are savings upwards of $700 million per day with the current gas prices versus the recent high-priced past,” Kilduff recently told CNBC.
He said states like New York, Florida, and California that see a lot of tourism and regions with industries that are dependent on buying fuel for everyday business activities are reaping the benefits of cheap oil and gas.
Lower fuel prices are also good for states like Ohio, Illinois and Michigan and could bring help to more rural states with large farming sectors like Iowa and Kansas. Yet the entire agricultural sector — from crop prices to farmland values and stocks such as Monsanto and Deere— have been slammed.
“This is good for the entire transport sector, which includes airlines, trucking companies, and freight companies as well as fast food conglomerates and retailers (especially lower-end),” Kilduff said.
Moody’s Investors Service v.p. Kurt Krummenacker said there was a clear connection between low oil prices and the positive effects it has on airports, seaports, and toll roads.
“For each of these, low oil prices incentivize the moving of people (airports, roads) and the moving of goods (seaports), which generate revenue.”
Yet ETFs that track the transport and shipping sectors are doing little better — some worse — than the overall market.
Airlines stocks are down by 15 percent this year and the Guggenheim Shipping ETF, for example, is down by 14 percent. Trucking and rail stocks are in the red — though some like J.B. Hunt down less than the broader market, while others down more than the S&P 500.
The latest durable goods report released on Thursday showed that durable goods orders plunged 5.1 percent last month, the biggest drop since August 2014, after slipping 0.5 percent in November, according to Reuters. Orders for transportation equipment plunged 12.4 percent and bookings for non-defense aircraft plummeted 29.4 percent.
The data speaks to the many who remain skeptical of the upside to the cheap price of gas.
“The economic benefit to the U.S. as a result of low oil prices has been called into question due to the amount of economic activity that was generated as a result of the shale boom, itself,” Anthony Starkey, manager of energy analysis at Platts Bentek, an analytics and forecasting unit of Platts, an energy and commodities information provider. “The shale boom created high paying jobs and generated demand for investments in infrastructure to drill for, transport, and refine oil. All of this was funded with $100 oil and now that those prices have crashed, so too has the money it created in spurring that growth.”
Kilduff cited reports from the JPMorgan Chase Institute and Visa on the consumer spending boost in making his case, but there’s an interesting footnote — both reports were from the Spring 2015.
Diana Farrell, the CEO of the JPMorgan Chase Institute and lead author of the report, said the answer to the riddle is this: cheap gas did help the economy — past tense.
In the period that JPMorgan studied — April 2014 through January 2015 — there was a boost in consumer spending which the bank could track because it used debit and credit card transactions as the basis for its research. But in the update that JPMorgan plans to release this Spring using more current data, Farrell said the conclusion will be different: the boost from cheap gas already occurred and isn’t still happening, and likely won’t again.