Who Wins When Oil Declines?

Most of the sectors have benefited from the decline in oil prices. With the price of crude declining more than 20% we have seen all, but one sector (energy) rise since the high of $145 in crude in early July. Oil spiked 40% the three months prior to the high and gasoline at the pump was up 23%. All of this led to the cry of “uncle” by the consumer and many companies. Thus, a decline is just the medicine needed to get things back on track. According to analyst the outlook currently is for gasoline to drop near the $3.65 mark near term. This isn’t a tremendous drop, but it will help the outlook for earnings in companies as well as put some money back in the consumers pocket to spend elsewhere.

Oil has declined more than $30 per barrel leading to the establishment of the bottom on July 15th in equities and the subsequent rally. So, it begs the question where to invest? Scanning the 10 sectors of the S&P 500 you could have picked any of the other nine sectors and benefited from the drop in oil prices. The drop will continue to benefit earnings if we can hold the lower prices. Retail has bounced off the low from the tax rebates and could move higher in anticipation of the consumer having more discretionary income to spend. Transports are moving higher on lower cost and on the other side of the coin commodities are dropping on the expectation of lower cost. Bottom line? Stop looking to energy as a sector to buy and look at where the direct benefit is short term as the result of lower crude prices.

The biggest winners historically when crude drops more than 20% historically are Consumer Services ((NYSE: IYC) up 6.7%), Consumer Non-Cyclical ((NYSE: IYK) up 5.8%), Financials ((NYSE: IYF) up 12.2%), Healthcare ((NYSE: IYH) up 6.6%) and Transportation ((NYSE: IYT) up 5.5%). Taking a look at each of those sectors we see a nice move off the July lows when oil started to reverse direction. (NYSE: IYE) on the other hand during the same period is down 12.1%. If the price continues to move lower or remains in a lower trading range look for the benefits to continue to the other sectors of the market.