Charts of the Week: June 14, 2024

Over the last few years, oil prices – while quite volatile – have essentially gone nowhere. This year’s price increase has recently evaporated, shifting the year-on-year rate of change into to the second quartile from the third. If oil prices remain at these levels, the year-on-year rate drifts to contraction.

That’s important because there’s a strong historical relationship between the price of oil and inflation. It doesn’t much matter how you measure it (core or overall) or whether you are looking at coincident or forward inflation. Price pressure seen in oil, leads to markedly lower odds that inflation remains above 3%.

If this happens, what else would it mean??Real consumption growth is likely to improve, driven by an increase in real incomes as inflation drifts lower. Equity prices show a similar relationship of better average returns. So, on the margin at least, it’s a bullish indicator.

But that’s not true for Energy stocks, that are more likely to lag even the year following the downshift in price. It’s no surprise that Energy stocks are correlated with oil prices, but the driver of underperformance is Energy’s earnings growth that typically substantially lags the market. It’s not just that lower oil prices are bad for Energy stocks (and other defensive sectors), it’s that they’re quite positive for economically oriented sectors, like Technology. Bottom line: Historically speaking, there should still gas in Tech’s tank.?