This week I received the following message from my wife:
Hell, gas is five dollars a gallon!
Round numbers have a psychological impact for some reasons. This is especially true when prices are advertised on huge bright signs on the side of the road.
Wall StreetJournal He noted some research on this idea when it comes to gas prices:
Economists have found that round-number prices for retail products are salient to consumers. A 2010 article from the Brookings Institution found that people were unhappier on days when gasoline rose above $3.50 and $4.00 per gallon.
Why is $4 or $5 per gallon more important than $4.07 or $5.09? I don’t know.
Gas prices affect our psyche because they are so visible. But they are also seemingly marching to their own drummer.
When oil prices rise, gas prices also rise rapidly.
When oil prices drop, gas prices slowly drop as well.
Rise like a rocket, fall like a feather.
Can I prove this? Not necessarily, but it certainly feels like that’s the case.
Gas prices have been rising like a rocket in recent months:
This represents two major increases this decade; both caused by acts of war.
Prices vary by state but are high to quite high in many areas:
The crazy thing about gas prices is that they’ve been relatively stable for a long time, despite two big spikes in the 2020s.
If you adjust gas prices for inflation they really don’t look that bad:
Real (inflation adjusted) gas prices are basically the same as prices in 1990! This is crazy.
However, we do not adjust gas prices for inflation. We tend to adjust GPP, wages, sometimes interest rates, and stock market returns for inflation. Why not gas prices? I don’t know. This is how we do it.
Energy expenditures as a percentage of disposable income have been falling for years:
I honestly don’t know what to think about skyrocketing oil and gas prices right now.
Every energy analyst fears the disruption that closing the Strait of Hormuz would cause. The way he explains it sounds like the steamroller scene in Austin Powers.
Oilers can see what’s coming by looking at how disrupted energy markets are now.
The Financial Times shows how big the current disruption is compared to previous oil shocks:
It looks bad.
Gas at $6 a gallon doesn’t seem out of the question if we can’t resolve this issue soon.
The Economist thinks we need more pain for energy prices to have a big impact:
Frankly, the stock market doesn’t seem to care. Yes, there was a minor scar from the correction, but 8 of the last 14 trading sessions have seen all-time highs.
It is very clear earning and AI is now much more important to the stock market than oil and gas prices.
Will this dynamic continue if the war drags on and gas prices continue to rise?
Will households eventually cut back elsewhere or continue spending?
Will the stock market care about much higher oil prices at some point?
I DON’T KNOW!
Here’s what I know.
Making portfolio decisions based on geopolitical predictions is a fool’s errand. Many will try. Most will fail.
Economic consequences are difficult to predict. Geopolitical consequences are difficult to predict.
It is even more difficult to predict how these consequences will affect financial markets.
Sometimes you have to be willing to accept that there are some things that are out of your control.
I prefer to focus on the things I control.
How much am I saving? My asset allocation. Expenses I paid. My time horizon. My risk profile. My investment plan.
Predicting things you can’t control is fun, but it doesn’t do much good for your investment process.
Further Reading:
Don’t Fight the Stock Market
