Stocks rose broadly in thin trading Wednesday, as gasoline prices declined in the futures market to an eight-week low.
Up or down, “gasoline prices have a death grip on the way we think,” said Howard Simons of Chicago-based Bianco Research.
Crude oil for October delivery fell $1.74, to $43.47. A report indicated that U.S. gasoline inventories were stable, despite the onset of the Labor Day peak driving period.
Oil nearly hit $50 a barrel in futures trading last week.
Traders said the worst of this summer’s oil price run-up is not necessarily over, but remarked that the stock market has tied its fortunes to the price of oil, at least for now.
Treasury securities closed higher, despite the stock market’s advance. Analysts said reports on durable goods orders and new-home sales in July validated concerns that the economy is softening.
The Dow Jones industrial average rose 83.11 points, to 10,181.74, the highest close since July 14.
Only three of the 30 Dow stocks–Altria Group, Verizon Communications and Merck–failed to post a gain.
The broader Standard & Poor’s 500 index rose 8.77, to 1104.96. The Nasdaq composite index gained 23.83, or 1.3 percent, to 1860.72. The Russell 2000 index of small-company stocks added 5.13, to 550.14.
Coffee vendor Starbucks fell in late trading. The company posted disappointing August sales.
New York Stock Exchange volume reached 1.19 billion shares. Winners beat losers by nearly a 5-2 ratio.
Nasdaq volume totaled 1.28 billion shares, as winners topped losers by a 7-3 ratio.
The Treasury’s auction of $24 billion in 2-year notes brought a yield of 2.49 percent, down from 2.80 percent in July.
Oil’s grip: Energy consumption has declined as a factor in the nation’s economy since the 1950s. Energy prices adjusted for inflation are not out of line.
So why the obsession with oil and gasoline prices? Many issues affect short-term stock price movements. Right now, it happens that all eyes are on oil.
It’s not unreasonable that oil price trends should have at least a small impact on investor sentiment.
Simons, a former economist and energy trading adviser at Amoco, says gasoline prices have a strong psychological impact on American consumers and represent a tax that limits other spending.
Possibly for those reasons, the trend in energy commodity prices runs counter to the trend in stock prices for most sectors of the market, he said.
Over time, oil- and gas-related equities do not beat the market or match the advance in energy commodity prices.
Since 1994, for example, natural gas-related equities have captured only 80 percent of the stock market’s gain while natural gas prices have tripled, Simons said. “You would have been better off buying a broad index fund.”
But currently, energy stocks are the only broad sector benefiting from the run-up in energy commodity prices, he said.
On the flip side, complaints by officials of Wal-Mart Stores and other businesses that higher gasoline prices are hurting their business ring true.
“This is the only time in the corporate blame game where I can actually point to it and say, `You’re right,'” he said. “It’s very negative for pretty much all the economy that is not in the energy business.”
Simons believes oil prices have moved to a new plateau. Investors won’t stop focusing on that until it’s more broadly accepted by the public.
“It means we have to accept that $20 a barrel and maybe even low $30s is a thing of the past,” he said.
In the meantime, returns on energy stocks probably will continue to fall short of parallel gains in energy prices, Simons said. Energy companies remember what happened to their fortunes when the energy price spike of the late 1970s reversed course, in part because of conservation.
“We know from experience in the late ’70s and early 1980s that when you push prices up, it does change behavior. You remember those cars everybody was driving in 1981,” Simons said.
This time, “prices have not gotten to the point where it changes behavior, but everybody who is running an oil company today lived through that period.”
