Gas Prices Down, Stock Prices Up?

Wholesale gasoline prices have fallen sharply in the past couple of weeks. Indeed, according to the American Petroleum Institute, wholesale gasoline fell 7.6% during the week ended August 21, 2006 and now stands 14.5% below the record high price set on September, 5, 2005. We are already seeing the impact at the gas pumps. In our state, Massachusetts, regular has broken below $3.00 per gallon. We suspect we'll see further declines after Labor Day as summer driving demands lessen. This is clearly good news for drivers. It may also be good news for investors.

Why? Money not spent on gas will be spent elsewhere, giving a boost to retailers. Consumer confidence should improve as stability returns to the gasoline pump. And, most importantly in our view, stable or falling gas prices should help reduce inflationary pressures and perhaps let the Fed leave interest rates alone for a while. Reduced inflation, stable interest rates, and improved consumer sentiment should add up to a better environment for stocks.

Obviously, a serious disruption in oil supplies or refinery capacity would play havoc with our positive scenario. So, we'll be watching the pump and the Weather Channel for the next month or so. Let's hope for a mild hurricane season!