Crude oil prices have dropped sharply over the last few months thanks to abundant global production and signs of slowing global economic growth. Lower oil prices could inject spending power into the economy as consumers eventually pay less for gasoline and open their wallets in other areas. This would provide a positive shock and potentially bolster the performance of consumer discretionary shares.
Historically, there has been a robust relationship between the performance of consumer discretionary shares and changes in gasoline prices. The graphic below displays the relationship between the year-over-year change in the price of the S&P 500 Consumer Discretionary Sector Index relative to the price of the S&P 500 Index against the year-over-year change of US retail gasoline prices. The price change of gasoline is inverted in the graphic to correspond visually to the outperformance or underperformance in consumer discretionary stocks when crude oil prices rise and fall. The graphic suggests that a meaningful decline in the year-over-year gasoline prices may lead the consumer discretionary sector to outperform the S&P 500 Index. This happened in the late 1990s, early 2000s, and 2009 — illustrated by the arrows on the graphic.
The graphic also indicates that consumer discretionary stocks have been underperforming the S&P 500 in recent months despite the outlook for healthy holiday sales and continued growth in job creation. The National Retail Federation recently projected holiday sales would rise 4.1% in 2014 — the most since 2011. The current weakness may present an opportunity.