It all keeps falling into place.
Much as we expected it would.
The stock market rose for 12 days.
Now it has fallen for four days.
Are the good times over? Is it too late to buy stocks?
Not at all. One of the key bits of data we were waiting for confirms that everything is going to plan. Stocks are about to move higher — much higher…
Around last September, we started writing in earnest about falling oil prices.
In hindsight, that may not seem like such a big deal.
After all, the oil price was falling.
But think back to the context at the time. The price had dropped from US$105 earlier in the year, to around US$90.
That’s when we suggested the price could fall further. We even said that it was something investors should watch closely…as it would have a major impact on the markets.
As is turns out, it has. And there’s more to come.
Today, West Texas Intermediate crude oil is just over US$52. It has been even lower, almost falling below US$40 per barrel.
We’ll be honest — we didn’t expect the oil price to fall by quite as much as it has.
Whether it falls any further is anyone’s guess. More importantly, will it go higher again?
It could, but we’re not betting on that happening just yet. In our view, things have to get much worse in the oil market before the price rebounds.
Remember, Saudi Arabia and OPEC are still trying to make sure the world knows who’s in charge of the world oil market. They want to make completely sure that it’s OPEC and not the US.
So far, OPEC is winning…despite what the cheerleading US analysts claim about the continued dominance of the US oil drillers.
But while all this is fascinating, it’s not the real story. This is the real story, as the ABC reports:
‘Consumer confidence has jumped to its highest level in a year, with optimists just outnumbering pessimists.
‘The widely-watched and long-running Westpac-Melbourne Institute Index of Consumer Sentiment has jumped 8 per cent since last month to 100.7 in February.
‘That is the first time since February last year that the index has read over 100, indicating that optimists outnumber pessimists.’
It’s the wealth effect. And providing oil doesn’t move much higher from where it is today, it will have a huge impact on the markets.
How can this be anything but good news?
This is exactly what we said would happen. It’s why we tipped these three beaten down and hated stocks in the January issue of Tactical Wealth.
No one should underestimate the power of lower petrol prices.
It’s a big deal, in three ways. First, consumers feel the cost savings in their pocket. Less money spent on petrol means more money spent elsewhere, or perhaps saved.
Second, businesses get the benefit too. They get to enjoy lower transportation costs and potentially lower costs from suppliers. Plus, if consumers are spending more, it can help their bottom line.
Third — and this is something you probably haven’t considered — is the psychological impact. We don’t know about you, but we probably pass a dozen or more petrol stations between home and work each day.
There’s something satisfying about seeing petrol below $1 per litre. Even now, with prices up around $1.15 per litre, it’s better than the $1.50-plus prices we paid early last year.
It’s no wonder consumer confidence has increased. Having more money in your pocket and seeing lower petrol prices plastered on petrol station price boards each day is a sure confidence booster.
Of course, it’s not just petrol prices that will boost confidence. Last week’s interest rate cut by the Reserve Bank of Australia has no doubt helped too.
All this means one thing: if consumers begin to feel confident about the future, they’ll return to the shopping malls. That will have a positive impact on company finances, which will encourage investors to return to the market.
You’ve seen how this has played out in the US, UK, and Europe. It doesn’t necessarily mean there will be a full economic recovery just yet. But it does mean that falling fuel prices and interest rates will give many consumers the impression that things are on the up again.
In that environment, everything becomes a self-fulfilling prophecy, and stock prices should begin to take off. We know that not everyone will agree with our view. But to those who doubt things will turn out that way, we simply ask…
What forecast would you have for an economy with falling fuel prices, low interest rates, and rising consumer confidence? This is a proverbial no-brainer.
Publisher, The Daily Reckoning
P.S. We’ve backed three stocks to profit from the Aussie economic turnaround. You can find out more about them here.
Editor’s Note: This article was adapted from yesterday’s Money Morning.