Friday, December 18, 2015

Stock Market: The Big Misunderstanding

(Drivebycuriosity) - This week the US stock market closed in a gloomy mood. The S&P 500, the gauge for the US stock market, dropped around 3% since Wednesday. The Dow Jones Average, which contains airlines, shippers, railroad companies and such, dropped today 2.3% and slipped into bear market territory, meaning a minus of at least 20% from its peak, writes Marketwatch (marketwatch).

If we believe the media the losses were caused by the continuously dropping oil prices ( cnbc seekingalpha). This is ridiculous! The whole economy, and especially the transport sector, is benefitting from cheaper energy. Take for instance the airlines. They spend around 60% less for kerosine but they didn´t bother to reduce airfares because there is not enough competition.
Other transporters like shippers, bus companies and railway companies (diesel locomotives) are benefitting as well.

The Dow Jones Transport Average responds very sensitive to the business cycle. It seems that the market is getting more pessimistic for next year´s economy. But that does make no sense. History shows that dropping oil prices are a boon for the economy. I described here (driveby ) how the oil price collapse from 1986 had fueled the US economy and had started a period of economic prosperity.  The oil price collapse works like a global tax cut. Consumers world wide have more money to spend for other goods & services. Companies also benefit because they have to spend less for energy & materials. And dropping energy prices translate into lower transport costs which makes almost anything cheaper.

I suppose that this week´s sellout was caused by lousy programmed computers. These machines follow the instructions of programmers who have no clue about the economy and don`t care about historical facts. I think that the stock market will soon return to sanity.

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