A Twist in the 'Goldilocks' Story

Oil and gas prices keep going up... What this means for you and the market... A twist in the 'Goldilocks' story... Energy stocks have been big winners lately... Advice for the confused...

Yes, those are higher prices you're seeing at the gas pump again...

As our Stansberry NewsWire editor Kevin Sanford wrote this morning...

Every time I'm on the road and pass by a gas station, I sneak a peek at what that Shell or Exxon price sign says, hoping to be happily surprised by a cost decrease.

But more times than not, I find myself on the wrong side of the surprise, muttering to myself, "I swear gas was 10 cents cheaper yesterday..."          

It seems that over the past several weeks, as much as I wanted to ignore the legitimacy of what I was seeing, I simply could not.

Oil prices are on the rise again...

It's true. Oil prices have been on the climb, taking refined gasoline with them. Brent crude – the international benchmark for oil – is trading around $90 a barrel, up more than 25% since June...

About six weeks ago, I (Corey McLaughlin) wrote to you that oil prices were up 20% in a month and to keep an eye on them – because oil has a prominent role in the market outlook moving ahead...

This came to the fore in the markets earlier this week when Brent crude hit the nice round, higher number of $90, like a flashing alert sign to anyone who wasn't paying attention before.

Why this matters...

Oil, gas, and other energy prices generally have a direct influence on the "resilient" consumers – and businesses – who will need to spend more for transportation, electricity, and other needs. These costs also factor into the interest-rate outlook around the world.

All things being equal, higher energy prices would mean a "tighter" monetary environment dictated by central banks like the Federal Reserve. And prices have been on the rise the past few months, driven mostly by OPEC cartel kingpin Saudi Arabia and running buddy Russia cutting oil supply. They first announced cuts in April, and it's clear the Saudis want to fix the oil price around at least $80 per barrel (the country's approximate breakeven price).

The Saudis and Russians announced this week they will continue their production cuts of 1.3 million barrels per day through the end of the year. This ends up being significant to little old me buying gas down the street.

As I wrote in the July 31 Digest...

Oil prices rising 20% in a month certainly continues to muddy the idea that inflation is on a path straight down to hell. So long as the cost of oil continues to move higher, the global economy will likely continue to face higher prices on everything.

For example, the average price of a gallon of regular gasoline in the U.S. hit an eight-month high in the past week, at $3.75. So, keep an eye on oil prices...

Consumers like you and I could be facing higher costs than expected... and the central banks of the world may find continued reasons to "fight" high inflation (that they helped create, of course) by making their currencies more "expensive."

Since then, the national average for the price of a gallon of regular gas in the U.S. has ticked a little higher to $3.80. This is because oil prices account for about 50% of the cost of gasoline that you might pay at the pump. The rest is from taxes, distribution and marketing, and refining.

The point is, as Kevin wrote today...

The global crude oil market – which is largely affected by both the U.S.'s supply and that of its geopolitical rivals – drives the cost at the pump.

This means that here in the U.S., energy costs could prove to be a stubborn barrier to disinflation.

And don't get us started on the state of the U.S. Strategic Petroleum Reserve. It's no longer a part of any inflation-fighting plan or emergency for that matter...

It is basically tapped out from the government draining the reserves when war broke out in Ukraine, leading most Western countries to sever Russian oil purchases and other economic ties.

Today, rising oil prices may upset the 'Goldilocks' story...

By that, I mean the status quo narrative in the markets today. The pace of inflation is continuing to come down and will continue to do so... while the labor market remains strong. As I wrote the other day, talking about the government's August jobs report...

More than one analyst is calling it a "Goldilocks" report, meaning it showed the labor market slowing, but not by too much, essentially not changing the story for the economy right now.

But that story and optimism hinges on the idea that the pace of inflation continues to slow, or at least remains constant. That's what it has done in the past two months, at least according to the Fed's preferred inflation metric. As we wrote on August 31...

The "core" [personal consumption expenditures ("PCE")] reading, which the Fed favors when gauging inflation because it doesn't include "volatile" food and energy prices, showed 4.2% year-over-year growth in July.

That was slightly up from the 4.1% growth in June, but it was in line with expectations based on how headline PCE is calculated (year over year). Most important, month-over-month growth came in at 0.2%, which was the same as the month before... Overall PCE, with food and energy, also grew 0.2% month over month, the same as in June.

Those numbers are lagging indicators, though. They are as of the end of July. They don't include any influence of higher energy prices since then, including the latest 10% run higher in Brent crude prices since August 23.

What does this mean for stocks?...

Well, should central banks like the Fed feel like they have to keep raising interest rates higher than the market is expecting right now, prices could be due for an associated haircut in value. This recognition of higher energy prices is likely playing into the volatility we've been seeing in the market over the past few days, weeks, and months.

At the same time, while the major U.S. indexes have been gyrating a bit and are down over the past month, energy stocks are outperforming the market by a good margin. The Energy Select Sector SPDR Fund (XLE) is up 5% over the past month. No other major sector is higher than a few tenths of a percentage point in the same span.

In the past three months, XLE – whose largest exposures are to ExxonMobil (XOM) and Chevron (CVX) – has gained 15%. That's outperforming the next-best sector, industrials, by 10 percentage points... and it's five times the return of the benchmark S&P 500 Index. This might be different than some people expect, given the push for green energy.

In my memory, it feels like the days of late 2020 and all of 2021, when "hated" energy stocks were among the market's biggest winners, while inflation was on the rise and headed much higher. Take note. Should oil prices continue to move higher, more volatility could be afoot.

But this isn't all gloom and doom...

The other end of the higher oil prices story is potentially more growth for the parties involved... like energy companies. And when you look at their bullish run lately, in the context of a run higher for the broader market since last October, it's a reminder that different winners will emerge at different moments in a sustained uptrend.

In fact, this kind of "rotation" is a common trait of healthy bull markets. Obviously, popular tech stocks and anything associated with artificial intelligence got a bit of a bid in the first half of the year. But that's all in the past now.

What's next? Well, two of our top analysts are getting together soon to show you what they think. If you missed the AI rally earlier this year, for example, you won't want to overlook this new prediction about what happens next to U.S. stocks.

If you've been confused about what to do, sitting in cash, you don't want to miss this. The event is totally free and is set for Tuesday, September 12. All we ask is that you register in advance to make sure you don't miss anything. You can sign up now here.

New 52-week highs (as of 9/6/23): CyberArk Software (CYBR), Comfort Systems USA (FIX), Intel (INTC), Intuit (INTU), Ingersoll Rand (IR), Iron Mountain (IRM), Eli Lilly (LLY), Novo Nordisk (NVO), VanEck Oil Services Fund (OIH), Shell (SHEL), SLB (SLB), and Verisk Analytics (VRSK).

In today's mailbag, feedback on yesterday's Digest... nothing about the prospect of nuclear war, but thoughts on the results of Dr. David "Doc" Eifrig's recent food-shopping exercise... Do you have a comment or question? As always, e-mail us at feedback@stansberryresearch.com.

"Surprised you didn't comparison shop Wal-Mart. (I know the same owner as Sam's Club). Prices there are very good with surprisingly good produce. Plus you don't need to buy huge quantities to save, as you do at Costco." – Subscriber Larry B.

All the best,

Corey McLaughlin
Baltimore, Maryland
September 7, 2023