Sommer, Jeff. "STRATEGIES; Numbers That Sway Markets and Voters."
The New York Times. The New York Times, 04 Mar. 2012. Web. 08 Mar. 2013.
SOMETIMES a number is just a number. But on Tuesday, when the Dow Jones industrial average closed above 13,000, it was treated as much more than that. Many news accounts and market commentaries portrayed that clean, round string of digits as a milestone that signified the stock market had come a long way since the darkest days of the financial crisis. Oil and gas prices have also been rising, and are beginning to attract considerable attention, too. How high and how quickly those numbers climb — and whether they leap above $5 a gallon and morph into a painful symbol of inflation — could have an enormous impact on the financial markets, the economy and the presidential election.
“People may not remember too many numbers about the economy, but there are certain signposts they do pay attention to,” said Ethan Harris, chief North American economist at Bank of America Merrill Lynch. “As a shorthand way to assess how the economy’s doing, everybody notices the price of gas. It can have a big symbolic impact, and in a presidential election year, when the price is rising, that can create a big headwind.”
On Friday, gas prices averaged $3.74 a gallon nationwide, their highest levels in the winter months but well below the nominal record of $4.11 a gallon in July 2008. Adjusted for inflation, that would be $4.27 today. In California, the average price on Friday was already $4.34. Largely because of tensions in Iran and other countries in the region, oil prices rose more than 22 percent in the six months through Thursday, according to John LaForge, commodity strategist at Ned Davis Research. While those numbers may be disquieting,
they haven’t had much of an effect on either the stock market or consumer sentiment, said Ed Yardeni, an independent economist who has analyzed the price surge. Partly because energy companies including Exxon and Chevron account for 12.3 percent of the market capitalization of the Standard & Poor’s 500-stock index, rising oil prices “may actually be good for the stock market, up to a point,” he said. Since the second half of 2008, Mr. Yardeni says, there has been a strong positive correlation between energy prices and the stock market. If prices continue to rise, though, that benign influence is unlikely to last, he says. “At some point, you’ll have a negative feedback loop. High energy prices will correct themselves, and if they go high enough, the negative effects will spill over to stocks and the economy.”
Ned Davis Research has found that when oil prices climb by more than 33 percent in a six-month period, stock market performance then tends to weaken, Mr. LaForge said. Prices may not be a big problem right now, he said, but that could change quickly. How high will those prices go? Presumably, futures prices already reflect the collective intelligence of the financial markets, said Richard B. Hoey, chief economist of BNY Mellon. “
Those prices already factor in the risks of a possible war with Iran or an incident in the Strait of Hormuz that disrupts oil shipping,” he said.
He added that he expects that the impasse over Iran’s nuclear program will be resolved peacefully — and believes that, at the moment, the markets think likewise. Mr. Hoey said that oil prices might spike further, but that they were likely to come down without much lasting harm. “Of course, you never know,” he added. In the past, the domestic effects of rising gasoline prices have sometimes included a decline in auto sales. So far, though, the most recent energy price surge hasn’t had that effect. To the contrary, auto sales rose sharply in February, carmakers and analysts said last week, with the seasonally adjusted selling rate for new vehicles climbing to about 15.1 million, the highest level since February 2008. Rising energy prices tend to have a lagging economic impact, said James D. Hamilton, professor of economics at the University of California, San Diego. Unless income also rises — which isn’t happening for many people now — higher fuel costs will eventually displace other expenditures. And at a certain point, he said, there will be additional “nonlinear” effects if prices keep rising. It’s as though people finally sit up and really notice the price increase, and their behavior changes. “There’s no single magic moment when it happens,” he said. But the data indicates that this effect tends to kick in when the highest price level of the preceding three years is surpassed, he said. We’re not at those levels, but we could easily get there. For regular gasoline in the United States, that average price point would be $4.11 a gallon in nominal terms, and $4.27, accounting for inflation. For oil prices, it would be $145.29 a barrel for benchmark American crude, or $150.87, when inflation is factored in. Ugly-looking prices at the pump are never a good omen for incumbent politicians. Since 1976, they have generally been inversely correlated with presidential approval ratings, Ned Davis Research has found. In other words, the more expensive gasoline is, the less popular the president tends to be. The financial reason for this is obvious: with the possible exception of energy investors, few people enjoy paying more to drive. And because fuel costs affect many other items, including food, rising gasoline prices are often associated with an increase in the cost of living. ON the other hand, the behavioral changes cited by Professor Hamilton include measures to reduce energy expenditures throughout the economy. Thanks in part to the long-term impact of rising prices, the nation has become far more energy-efficient in recent decades, so high fuel prices today shouldn’t hurt as much as they once did. Figures provided by Ned Davis Research show that in December 1981, for example, energy expenditures accounted for 7.81 percent of disposable income in the United States, compared with only 5.5 percent in December 2011. Inflation-adjusted prices of gasoline were approximately the same in both periods, about $3.30 a gallon.
Higher fuel efficiency may account for the relatively strong level of recent auto sales, despite higher energy prices. Consumers have been buying smaller and less gas-thirsty vehicles, auto industry executives say. What’s more, inflation in the United States is quite low at the moment — largely because of the weak economy. Yet the apparent relationship between rising gas prices and falling presidential approval ratings appears to be as strong as ever, Mr. LaForge said. “President Obama will need to be paying close attention to gasoline prices, even if they don’t have the impact they once did,” he said.
