On Wednesday, the Federal Reserve could start a run of interest rate cuts with either a 25- or 50-basis-point cut. This has Wall Street excited.
It’s possible that the S&P 500 index will start the week just a little below its all-time high. This is because 2-year Treasury yields are at their lowest level since September 2022.
Researchers at Jefferies, on the other hand, say they are “ambivalent to the size of the first cut…as the implications for the economy appear to depend more on the direction of travel for interest rates than the precision of the delivery mechanism over time.”
As it turns out, the Jefferies team led by Andrew Greenebaum is focussing on what they see as another important factor that affects the U.S. economy: energy costs.
Their report says that after a rise in the summer, the price of WTI crude CL.1 0.80% has once again dropped below $70 a barrel. It hit a low point of $65.75, which Jefferies says is the lowest close since December 2021.
Most importantly, this has meant that petrol prices for people in the U.S. have been reliably lower. Jefferies says that the average spot price of petrol last week, $3.24, was the lowest since the middle of February. The company thinks that the price will continue to go down.
Jefferies notices two things. U.S. spot petrol prices have gone down 16% in the past year. Jefferies says, “while the nominal price remains high, not many consumer-borne costs are down around 20% over the past year.”
Also, “as a frequent direct purchase for U.S. consumers and an input for many of the other goods they buy, even more downside should be very good for wallets, even if the job market is less tight,”
They want to know what this means for stocks. So, they looked at data from 1991 to see how different indices traded when spot petrol prices dropped by about the same amount every year.
A few important results were noticed. First, they found that the S&P 500 has gone up 18% on average over the next 12 months each of the 13 times this has happened. There have been only three times when it went down, and Jefferies thinks that two of those were because of tech bubbles.
Next, they say that “our favourite discretionary stock proxy (S&P Retail Select Index), while extremely volatile, has tended to outperform substantially.” The Russell 2000 is the same way.
Jefferies says that a drop in petrol prices “also tends to be good for the overall commodity index (even though crude is included), probably because better global activity more than makes up for lower crude/gasoline prices.”
Lastly, and this may be the most important thing for many investors today, the Nasdaq 100 has a history of regularly beating the S&P 500 index over the next 12 months by large percentages.
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