Friday, March 29, 2024
Hometalking numbersWorried higher gas prices could ruin the rally? Here's why you shouldn't

Worried higher gas prices could ruin the rally? Here’s why you shouldn’t

If filling up your car seems more expensive, that's probably because it is more expensive.

Quietly, wholesale gasoline prices have been on a tear, hitting an eight-month high as a combination of higher oil prices and refinery outages have conspired to cause more pain at the pump.

(Watch: Pain at the pump: Gas up 6 percent in April)

So what could this mean for the stock market given that, at least according to some economists, each penny increase in gasoline prices equals $1 billion dollars less spent on other parts of the economy?

Curiously, it may not be such a bad thing.

"Gas prices have largely been a proxy for the broader economy. Strength in the economy filters down to higher gas prices, and we are seeing that," said Richard Ross of Auyerbach Grayson and a Talking Numbers contributor.

While most people correctly assume that higher gas prices siphon off money from other parts of the economy, energy stocks do comprise 11 percent of the S&P 500, making it the fifth largest sector, according to Thomson Reuters. As energy stocks rally, they tend to carry the broader market along with it. In other words, what's bad for the economy may not be so bad for the stock market.

"Gasoline prices act as a tax on the consumer, so higher gas prices will eventually impact consumer demand, but that doesn't necessarily feed through to stock prices," said Enis Taner of Riskreversal.com. Stock prices have risen in spite of a weak macroeconomic backdrop in the U.S. for years now. "If and when stocks do fall, it is not likely to be due to macroeconomic factors like gas prices."

At some point, increased prices at the pump are sure to become a concern. But traders say it's likely to come at a much higher level and impact more economically sensitive sectors.

(Read: )

"It's an interesting correlation. We think somewhere near $4 is where that might choke off consumption and be a problem for the market. We do think it will be a headwind for the consumer discretionary type names," said Andrew Burkly, head of institutional portfolio strategy at Oppenheimer. Interestingly enough, consumer discretion stocks have been among the worst performing sectors this year – down about 4.6 percent year-to-date.

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