Anyone following worldwide news is certainly aware of the problems Europe is facing. In an economy that is increasingly global, one relatively small country, such as Greece, can have repercussions throughout the world.
While the developments in Europe are generally considered a negative, there are some positives for the U.S. consumer. The most significant positive is the price of gasoline.
Living in California it is more difficult to think of lower gasoline prices, as the price at the pump statewide is just about $4 per gallon. However, on a national basis gasoline is averaging 50 cents a gallon less at $3.50 per gallon.
Gasoline in California is normally higher priced versus national totals because of our higher taxes and pollution standards. The current differential is higher than normal because of refinery issues impacting the Western states.
In recent months, the price of oil has dropped about $20 per barrel. The price of crude oil is the biggest determinant that goes into the price of gasoline.
A $10 move in the price of crude oil normally translates into a change of $.25 per gallon. On a national basis, the price of gasoline has fallen approximately 50 cents from its recent highs, which corresponds to the change in the price of crude oil. The price of gasoline has dropped somewhat in recent weeks here, and should drop further, as refinery issues are cleared up.
There are several reasons that account for the recent drop in the price of crude oil. Because of the European crisis, the demand for U.S. dollars has increased allowing our currency to strengthen. Since oil is a global commodity, a stronger dollar reduces the relative cost of oil for U.S. consumers. In addition, worldwide demand for oil has been less than anticipated because of the slowdown in Europe, which helps to lower prices.
Supply issues also play a major role in the price of oil. Earlier in the year, Iran was a major concern. While there has not been any major supply disruption from the Middle East currently, there still exist potential problems.
The recent drop in the price of gasoline acts like a tax cut for consumers. This also tends to boost consumer confidence, which would likely be lower, had gas prices not dropped recently.
While Europe will be a negative for our exporters, increased consumer demand from lower gasoline prices should offset weaker international growth. On balance, economic growth in the U.S. will probably not change significantly for the balance of the year.
For the investor, European news will still dominate the stock market in the short run. The recent election will allow Greece to stay in the Euro for now, which resolves some uncertainty. However, Spain which is a much larger country than Greece, is having increasing difficulty finding buyers for its government debt.
Since I expect the U.S. economy to remain reasonably stable, normal allocations to the stock market are still appropriate for the long term investor. For someone with a shorter term outlook would be more conservative, as volatility will likely remain somewhat higher for a period of time.