Falling energy prices too much of a good thing?

Although they have a positive effect on consumer spending, they are also inflicting collateral damage.

Robert Johnson, CFA 15 December, 2014 | 6:00PM

It was a terrible week for just about every equity category. U.S. stocks were the relative winners, with the S&P 500 Index down "just" 3.4% for the week. On the other end of the performance scale, emerging-markets equities were down a stunning 6.2% and Europe was down 5.2%. Even with a further drop in oil prices (oil prices are now under US$60 a barrel) a benchmark commodity index was able to limit losses to 4.2%. The market turmoil seemed related to the fact that falling oil prices might be turning into too much of a good thing.

News out of China also suggested that the government was more interested in driving the Chinese economy more toward consumption and making long-term structural changes. Missing for now are discussions of short- and intermediate-term economic growth targets for China, which clearly spooked the market. The U.S. economic news this week could not have been much better, but no one really cared. News included improved retail sales, falling budget deficits, more small-business confidence and continued growth in job openings.

For months, many, including me, have been happily cheering falling energy prices and the positive effects that they were likely to have on consumer spending. However, energy prices may have fallen a bit too far and have begun inflicting some collateral damage. West Texas Intermediate has fallen from a high of $105 to $57 (all oil prices are in U.S. dollars). Certainly, the falling gasoline prices that have resulted from the oil price drop have been the rocket fuel behind this month's stunningly good retail sales report.

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Robert Johnson, CFA

Robert Johnson, CFA  Robert Johnson, CFA, is director of economic analysis for Morningstar.