Joanna and I were on the golf course this weekend talking about how much we pay for gasoline these days. Exciting life we live. I had mentioned I recently saw regular unleaded at $1.27. I further mentioned seeing gasoline prices hit under 1 dollar back when I was in high school in the mid to late 80’s and how adults said “You will never see this again”. As it turns out, gasoline prices spent most of the next 15 years fluctuating between $1.20 and $1.50.
Go back a little further on oil market and you will see that it spent the 1970’s rising until the Iraq-Iran war broke out and oil later topped at in the high $30’s in 1981. Oil spent then spent next 5+ years falling 50% while the market was up nearly 50% over that time. Within those five years, the first move down in oil during that time was a 15% drop between March of ’81 and May of ’82. Surprisingly the market followed suit with oil and the S&P 500 dropped 20% over that same time. Eventually, however, the “good” in low energy prices started to overtake the “bad” in low energy prices and the result was one of the greatest bull runs of all time. An 18 year run that saw the S&P 500 advance 1250% while gasoline remained in a fairly tight range most of that time between $1 and $1.50 at the pump. Perhaps not surprisingly the bull run in stocks came to an end as oil finally rallied sharply out of its trading range to top out in 2000.
Certainly patterns are not always repeated nor do they match exactly every time but I believe this one has a message. As dislocations in the market occur, it may take time for investors to gather themselves. In the example above, falling oil went on for over a year before the market responded. Then it responded with a vengeance. Could that not be what we have here? Oil is falling, why isn’t the market up? Maybe it is just a delayed reaction like the 80s. Consider the following from a Bank of America note;
• Cheap input costs for a variety of industries
• After years of stagnation, lower gasoline prices are moving miles traveled by conventional gasoline powered vehicles back up in the US
• According to manufacturers, lower gasoline prices are leading to emerging markets beginning to buy larger vehicles (China SUVs up 60% Year-over-Year)
Bank of America calls this possibly one of the largest wealth transfers in human history. They are looking for $3 Trillion a year to move from oil producers to global consumers. They are finally seeing falling prices lead back to a pickup in demand. I would add to that, that this time you will have more supply to potentially keep prices flattish. In my opinion this would also look like the 80’s scenario. If we are part of this wealth transfer, does that not portend better days ahead for economies, profits and therefore markets?