Falling Oil Prices. Friend of Foe?

The stock market was up again in November. But few people were even aware of that fact because the headlines have been all about oil and how cheap it has gotten. The price of oil is down to where it was back in 2009! So while the price of oil is falling, the S&P 500 continues to solidly hold on to it's year-to-date gains. What does this mean to the U.S. economy and to us? Well, at the risk of sounding non-committal, it depends....

A week ago, the price of oil fell 10% in one day when OPEC declined to cut oil production in the face of falling prices! Can you imagine the "end of the world" prognostications if the stock market dropped 10% in one day? The panic would be incredible! The only people panicking about the drop in the price of oil are the speculators and investors in oil and oil related companies. People like you and me, who fill our cars up at the gas station, are rejoicing at the fact we are paying gasoline prices that we haven't seen in years! No panic here. We are happy to have that extra spending money in our pockets.

In order to assess the impact of lower oil prices on the U.S. and world economies, we must look for clues concerning the reason for this drop in the price of oil. For this we need to think back to our Economics 101 class and what we learned about supply and demand. Are lower oil prices being caused by increasing supply? Remember, increased supply causes prices to drop. This would be a good thing for the economy - mainly because it would give consumers more disposable income. On the other hand, if lower oil prices are being caused by weakening demand, then this could be a harbinger of bad things ahead for the economy. Commodity prices, such as oil, are usually the most sensitive asset class with regards to a weakening economy and to an impending recession. Obviously, this would be a bad thing for economic growth. See? Just like I said earlier, it depends.

In my opinion, I believe that lower oil prices are not foreshadowing an economic slowdown. And I do not appear to be alone in this thinking. The fact that the S&P 500 has continued to rise while oil prices have fallen, shows that most investors continue to have a bullish outlook on the U.S. economy. Couple this with the fact that U.S. stocks and international stocks are currently the strongest asset classes out of the six that I evaluate daily, and you will see why I remain bullish. It is not because my gut tells me to be bullish. It is because the indicators that I follow are based on the irrefutable law of supply and demand and not on the predictions for our economic growth by the so-called experts. As I have said many times before, my indicators will tell me when it is no longer prudent to be bullish on U.S. and international stocks. In the mean time, enjoy the lower prices at the pump.