Stock Market: Out Of Mind

(Drivebycuriosity) - Last week the stock market showed how irrational he can be. Stocks dropped sharply, especially on Friday. The S&P, the gauge for the US stock market, lost about 4% last week and is down 2% year-todate. The stock market responded to the falling oil prices, explain MarketWatch and other media services (marketwatch). Brent Crude, the gauge for international traded oil, dropped abut 10% last week. The stock market ignored Friday`s retail sale numbers which showed that the US consumers - the enginge of the economy -  respond positiv to the falling oil prices and are shopping more (driveby).

Even the stocks of consumer companies who benefit a lot from cheaper oil like Disney (more people travel to their parks), Home Depot (consumers have more money to spend for their homes) and Nike (savings at the gas pump are used for buying stylish products).

Cheaper oil puts more money into the consumers pockets, encourages businesses to invest more (because of the lower energy and transport costs and climbing consumer demand) and is keeping interest rates low (thanks to the low inflation rate). Even if the Fed will hike interest rates coming Wednesday the move be very modest because they don´t have to fight against inflation.

The oil price crash of the last 18 months reminds to the oil price collapse of 1986. Then Saudi Arabia started to pump much more oil (to get rid of competitors as they do today) which lead to a period of cheap energy through around 2002 - just interrupted by a short spike in 1991 caused by the first Iraq war (wsj the link is behind a paywall, but if you copy it into Goggle search it should function). The oil price crash from 1986 was followed by a period of economic prosperity and the S&P 500 climbed from around 200 points onto 1,400 points.

 

Last week`s stock market sell off was - as so often - caused by the negative sentiment and the herd behavior of fund managers who ignore economics & history and sell when others sell. It seems that the current focus on the oil price is obstructing the view on the positive and improving economic fundamentals (growing job market, expanding service sector and climbing retail sales). I think that last week`s selling pressure will soon be forgotten - like any dip since the begin of the bull market in spring 2009.