The sharp decline of oil prices has been very good news for consumers. Gasoline prices have fallen. This leaves more money in family budgets. This is good news.
Here is the bad news as of June 25.
The biggest selling pressure came from cyclicals but was broad-based. All 10 sectors in the Standard & Poor’s 500 went negative. Energy and financial stocks fell more than 2 percent each, while consumer staples and utilities suffered the least damage.
The impetus for the market’s aggressive selloff, which comes after last Thursday’s 251-point drop in the Dow, was the familiar fear that the euro zone was on the cusp of imploding.
“What’s driving the trade is the dawning recognition that the euro zone is fatally flawed and it’s dragging down the rest of the world economy with it,” said Walter Zimmerman, senior technical analyst at United-ICAP in Jersey City, N.J. “For a while now the problem in Europe has been blindingly obvious everywhere except Europe.”
Why should oil’s price fall because of Europe? Because uncertainty in Europe is causing investors to sell stocks. But why?
Because Europe is already in a recession. In a recession, consumers cut back on spending and put their money in safe havens, such as German banks. They reduce their spending on consumer goods.
This puts pressure on retail sellers. They lose money. They order fewer goods to sell. Unemployment rises.
As demand falls for consumer goods, demand also falls for commodities. This includes gasoline. This decline in reduces demand for oil. Oil’s price falls.
Oil’s fall in price is not driving the stick market. On the contrary, the market is driving oil. Oil is an early indicator of a falling market for consumer goods. Buyers are already going on the defensive.
Causation moves from investors’ expectations about future consumer demand to present prices for capital goods: tools of production. The price of capital goods is a way to assess what investors think is coming.
A fall in oil’s price signals concern over a recession.
But a fall in oil’s price also signals that investors don’t think Israel is about to attack Iran. This is good news.
Are you prepared for a recession next year? Oil’s fall is an early warning sign of a recession. It has already hit Europe. The threat is this: it will hit the United States, too.