Falling energy prices should be a boon for businesses and consumers alike. A gallon of unleaded is averaging a little more than $2 nationwide, down from a record $4.11 in 2008. That's like scoring $25 to $55 on every trip to the gas station, depending on your car. Collectively, we're saving $800 million a year—just at the pump.
You'd think all that extra cash would rev up the economy and stocks. After all, consumer spending accounts for two-thirds of U.S. gross domestic product. And it's not just consumers saving on gas, electricity, and heat. Every company on the planet has pocketed some money from falling energy costs.
Perversely, however, stocks seem to fall whenever oil slides. "There's about an 85% correlation between stocks and oil," says Dirk Hofschire, senior vice president at Fidelity Investments. That's a tighter alignment than you would find in a Maserati's front end.
For one thing, energy became more important to the economy during the boom in shale-oil drilling, or fracking. From 2010 to 2014, the oil patch accounted for a third of U.S. economic growth, says Mark Vitner, senior economist for Wells Fargo Economics. "The loss of that sector left a big hole," Vitner says.
Cheap oil is also putting sand in Wall Street's gearbox because it could be signaling falling global demand on top of a supply glut, notes Jeff Rosenberg, BlackRock's chief investment strategist for fixed income. Yet there are few signs that a recession is looming in the U.S., as the economy is growing more than 2% this year and is expected to accelerate in 2017.
Wait for Oil to Trickle Down
While the benefits of cheap oil are considerable, they accrue slowly, says Vitner. "Consumers don't save that money all at once—they save a bit each week," he says. And it can take months for households to feel that low gas prices aren't a fluke.
Yet eventually, spending will get a boost. So low prices are great for consumer companies that use lots of fuel. An example is FedEx , which wins from increased spending and cheaper jet fuel.
Three other clear beneficiaries: Delta , American Airlines , and JetBlue , says Jim Corridore, director of industrials research at S&P Global Market Intelligence. These airline stocks all trade at a price/earnings ratio below 10.
If you prefer to go through a fund, SPDR S&P Transportation ETF owns airlines and FedEx. For broader exposure, check out iShares U.S. Consumer Services , which owns transports plus pure consumer stocks like Costco and Walmart.
Says Rosenberg: "Lower oil prices might not be producing the boost to consumption you'd expect, but it's still there."
Columnist John Waggoner is the author of three books on Wall Street and investing.