This article was written by Invesco PowerShares Senior Equity Product Strategist Nick Kalivas.
The US economy has seen slow growth in the wake of the Great Recession. Deleveraging, regulation and weak demand have been a few factors restricting the rate of growth, but one sometimes neglected factor is the price of gasoline.
The impact of gasoline on growth
Something happened to the gasoline market in the 2004-to-2005 period, as the price jumped to a new level. The most likely explanation rests in increased Chinese demand and a slow reaction to the need for increased production. Whatever the reason, the increase coincided with a fall in the US gross domestic product (GDP) growth rate. As seen in the chart below:
- Between 1990 and 2004, GDP growth averaged 3.06% year over year, and the price of gasoline averaged $1.26/gallon.1
- Between 2005 and present, GDP growth averaged 1.55%, and gasoline prices averaged $2.95/gallon.1
Simply speaking, the GDP growth rate has been cut almost in half while the price of gasoline has more than doubled.
In the graphic above, the dashed lines highlight GDP growth and gasoline prices over time, while the darker solid lines highlight average GDP growth and average gasoline prices. There appears to be a clear increase in gasoline prices and decrease in growth – high gasoline prices have not been positive for growth, holding other factors constant.
The recent drop in energy prices should add economic stimulus
Brent crude oil prices have recently dropped to the $60 to $70 range, which equates to a US national average gasoline price range of about $2.40 to $2.60/gallon.2 By comparison, prices averaged about $3.40/gallon in the first quarter of 2014.3 The fact that consumers and non-energy businesses have become used to high fuel prices, and gasoline prices are now moderating, should lead to extra spending power in the economy.
It is no wonder retail stocks are rallying
The S&P 500 Retailing Index recently broke out of an approximate one-year trading range to the upside – the sector had been trapped between about 960 and 830 most of 2014. The breakout after a year of consolidation suggests investors see renewed vigor in the consumer sector. Chart watchers are likely to think about the implications of the breakout and the potential for further strength.
Arguably, the last major material non-US recession break in the crude oil market occurred in early 1997 and lasted until June 1998. During this time, the price of gasoline dropped 19% from the middle of January 1997 to the middle of March 1998. In the same period, the price of the S&P 500 Retailing Index rose or 75%.3
Ideas for gaining retail exposure
The 321,000 increase in November nonfarm payrolls is likely to complement the drop in energy prices and keep investors focused on the consumer sector. Signs of labor market strength and cheap energy prices bode positively for discretionary consumer spending going into 2015.
Investors looking for exposure to the consumer sector may consider either the PowerShares Dynamic Retail Portfolio (PMR) or the PowerShares DWA Consumer Cyclicals Momentum Portfolio (PEZ). PMR tracks an index that invests in retail stocks based on price momentum, earnings momentum, quality, management action and value. PEZ* holds consumer stocks that are displaying relative price strength. They are two smart beta solutions for investors looking for non-market-cap-weighted investment in the consumer sector.