Falling Gas Prices Fuel Holiday Cheer

My Comments: A good friend of mine who owns several gas stations says he loves it when the price of gasoline falls. The reason: it’s much easier for him to increase his margin of profit when the price is falling than when it’s going up. Everyone loves falling prices so there is less competition among retail outlets. When it’s rising, the game is won by those willing to accept a smaller profit per gallon.

I read this morning that prices in the South may go as low as $2 per gallon. It’s a reflection of our ability to produce more domestically via fracking and an economic slowdown across the planet leading to less demand for oil. Enjoy it while it lasts.

November 21, 2014 / Scott Minerd / Guggenheim Partners

Rising equities and falling prices at the pump will bring holiday cheer, but be aware of potential headwinds as we head into 2015.

Economic data from Japan this week was much worse than expected. Japanese GDP decreased by an annualized 1.6 percent in the third quarter, despite forecasts that it would rebound by 2.2 percent. In Germany, the economy only narrowly avoided falling into a technical recession in the third quarter, expanding at 0.1 percent, a figure that will do little to alleviate concerns surrounding the euro zone’s main growth engine. Economic weakness around the world is being directly translated into the price of oil.

The short-term trajectory of oil prices will depend on a number of factors, including the growth outlook for Europe and Asia, as well as the global supply/demand dynamic. Despite the recent decline in market prices, producers in the Middle East have not yet cut back on production. With fracking having fundamentally increased output in the United States, I suspect that oil is at least ten dollars a barrel away from any kind of price support.

While gas prices at the pump have been heading lower recently, U.S. equities have been moving in the opposite direction. In this regard, the domestic economy will likely benefit from both the wealth effect of rising equity prices, as well as the consumer spending power released by the decline in gasoline prices. Lower gasoline prices act like a tax cut, leaving more money for American consumers to spend on other goods, which is likely to provide the U.S. economy with a boost as we head toward the all-important holiday shopping season.

Despite the positive backdrop for the nation’s economy, the current rally in U.S. equities has still not been confirmed in the NYSE Cumulative Advance/Decline Line and investors would be well advised to monitor this closely. Historically, a persistent divergence between the Dow Jones Industrial Average and the Advance/Decline Line usually leads to a correction in equities. Whether or not the Advance/Decline Line can catch up with the increase in equity prices over the next few weeks will determine whether the current rally is sustainable.

Due to plummeting oil prices, the cost of gasoline in the United States is now at the lowest level since 2010. Gasoline consumption as a share of total spending should fall in the fourth quarter due to lower prices, freeing up income for spending in other areas. Even if gasoline prices remain unchanged for the rest of the year, we project real discretionary consumption should rise by the most since the beginning of 2011, helping to spur GDP growth.