With gasoline prices declining, analysts at Jefferies have examined how this trend could impact the stock market, Market Watch reports.
After a summer rally, the price of West Texas Intermediate (WTI) crude oil recently fell below $70 per barrel, with a low of $65.75 last week—the lowest since December 2021. This drop has resulted in lower gasoline prices at the pump for US consumers, with last week’s average spot price at $3.24, the lowest since mid-February. Jefferies expects this downward trend to continue, which could significantly benefit consumer spending.
The analysts at Jefferies, led by Andrew Greenebaum, highlight two key points regarding the impact of lower gasoline prices. First, US spot gasoline prices are down 16% year-over-year, providing relief to consumers at a time when few other costs have decreased. Second, gasoline is a frequent and significant purchase for US consumers and a critical input for other goods. Lower prices should positively affect consumers’ wallets, even in a somewhat less tight labor market.
Jefferies also analyzed how stock markets have responded to similar declines in gasoline prices since 1991. Their findings reveal that when US gasoline prices drop by a comparable margin over 12 months, the S&P 500 index has historically rallied by an average of 18% over the following year, with negative returns occurring in only three out of 13 instances. Two of these negative outcomes were linked to the early 2000s tech bubble.
Other key indices, such as the S&P Retail Select Index and the Russell 2000, have also shown significant outperformance in these periods. Additionally, Jefferies notes that lower gasoline prices tend to boost the broader commodity index, as the positive effects of cheaper fuel are typically offset by increased global economic activity.
For technology-focused investors, Jefferies highlights that the Nasdaq 100 has consistently outperformed the S&P 500 in the 12 months following similar drops in gasoline prices. This suggests that declining energy costs may lead to favorable conditions for tech stocks, helping the index achieve stronger returns.
As markets opened on Monday, US stock indices were mixed, with the S&P 500 and Dow Jones Industrial Average seeing modest gains, while the Nasdaq Composite edged lower. Treasury yields dipped, and oil prices showed signs of recovery. With the Federal Reserve expected to announce an interest rate cut soon, Jefferies emphasizes that while energy prices may not be the central focus, they are a crucial factor in the overall economic outlook.
