MW As gasoline prices slide, here's how the stock market tends to respond says Jefferies

By Jamie Chisholm

Critical information for the U.S. trading day

The prospect of the Federal Reserve on Wednesday starting a cycle of interest rate cuts - with either a 25 or 50 basis point reduction - has gripped Wall Street.

The S&P 500 index will start the week a fraction below its record high as 2-year Treasury yields trade at their lowest since September 2022.

However, analysts at Jefferies profess to being "ambivalent to the size of the first cut...as the implications for the economy appear more dependent on the direction of travel for interest rates than the precision of the delivery mechanism over time."

Indeed, in a note published over the weekend, the Jefferies team led by Andrew Greenebaum, are focused on what they consider another crucial driver of the U.S. economy: energy prices.

They note that after a summer rally, the price of WTI crude (CL.1) has again dropped below the $70 a barrel mark - at one point last week falling to $65.75, which Jefferies says was the lowest close since December 2021.

Crucially, this has translated into consistently lower prices at the pump for U.S. consumers. Last week's average spot gasoline price of $3.24 is the lowest since Mid-February says Jefferies, and it reckons the downtrend will continue.

There are two points that stand out to Jefferies. First, the 12-month change in U.S. spot gasoline is minus16%: "while the nominal price remains elevated, not many consumer-borne costs are down around 20% over the past year," says Jefferies.

And second, "as a high frequency direct purchase for U.S. consumers and an input for many of their other goods purchases, even more downside should bode incredibly well for wallets, even if the labor market is less tight."

But what, Jefferies asks, does this mean for stocks? Well, analyzing data back to 1991, they looked at how several different indices traded when spot gasoline prices saw a 12-month decline of similar magnitude.

They noted a few significant outcomes. First, they found that of the 13 times this has occurred, the S&P 500 has rallied 18% on average over the next 12 months, with only three instances of negative returns, two of which Jefferies reckons were tech-bubble related.

Next, "our favorite discretionary stock proxy (S&P Retail Select Index), while extremely volatile, has tended to outperform substantially," they say. The same is true of the Russell 2000.

In addition, such a slide in gasoline prices "also tends to be a boon to the overall commodity index (despite crude's inclusion), presumably as lower crude/gasoline prices is more than offset by better global activity," says Jefferies.

Finally, and perhaps most importantly for many of today's investors, the Nasdaq 100 has tended to consistently outperform the S&P 500 index by high percentage margins over the following 12 months.

Markets

U.S. stock-index futures (ES00) (YM00) (NQ00) are a fraction higher early Monday as benchmark Treasury yields BX:TMUBMUSD10Y dip. The U.S. dollar index DXY is lower, while oil prices (CL.1) slip and gold (BTCUSD) is trading around $2,586 an ounce.

   Key asset performance                                                Last       5d     1m      YTD     1y 
   S&P 500                                                              5626.02    4.02%  1.29%   17.95%  26.42% 
   Nasdaq Composite                                                     17,683.98  5.95%  0.30%   17.80%  29.00% 
   10-year Treasury                                                     3.646      -5.80  -23.00  -23.49  -66.25 
   Gold                                                                 2614.7     3.12%  2.84%   26.20%  33.73% 
   Oil                                                                  69.44      0.93%  -5.92%  -2.65%  -23.68% 
   Data: MarketWatch. Treasury yields change expressed in basis points 

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The buzz

U.S. economic data due on Monday include the Empire State manufacturing survey for September, released at 8:30 a.m. Eastern.

The FBI said it thwarted a second assassination attempt on former President Donald Trump.

Intel shares $(INTC)$ are up nearly 4% after Bloomberg News reported late Friday that the company has qualified for up to $3.5 billion in federal grants to make advanced chips for the Pentagon.

The dollar weakened to less than 140 Japanese yen $(USDJPY.FOREX)$ for the first time in more than a year.

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The chart

Silver has struggled to keep up with gold's regular record-setting. But Mark Newton, head of technical strategy at Fundstrat provides the chart below that he says shows in just the last two trading days that the grey metal "has begun to accelerate dramatically."

"Silver arguably is breaking out of its downtrend ," says Newton, and this "should allow for an eventual push up to test $32.75, made back in May for front month silver futures."

Top tickers

Here were the most active stock-market tickers on MarketWatch as of 6 a.m. Eastern.

   Ticker  Security name 
   NVDA    Nvidia 
   TSLA    Tesla 
   GME     GameStop 
   AAPL    Apple 
   NIO     Nio 
   PLTR    Palantir Technologies 
   HOLO    MicroCloud Hologram 
   TNON    Tenon Medical 
   INTC    Intel 
   AMC     AMC Entertainment 

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-Jamie Chisholm

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September 16, 2024 06:31 ET (10:31 GMT)

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