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Sullivan's Market $ense

Brian B. Sullivan, CFA, President and Chief Investment Officer, Regions Investment Management

September 18, 2014

A column to help investors gain perspective on today's market noise

The Price of Gasoline is Falling.  Ain’t That Great?

A member of our staff recently called the changes in oil prices Contra-Seasonal.  In other words while we expect oil prices and gasoline prices to rise all summer from greater summer driving, this summer they fell all summer.  The effects can be seen in recently reported inflation numbers and in consumer spending on other items.  Ordinarily falling prices for petroleum is nothing but good.  As an importer of half of our petroleum needs it means more dollars stay at home.  When falling petroleum prices translate into falling gasoline prices it means more money available for debt reduction, dining out, clothes and vacations.  It also means the cost of business declines; allowing for higher profits and spending on expansion.  What’s not to like?

If lower petroleum prices mean lower inflation and keeps the Federal Reserve from raising rates it could mean serious trouble down the road.

The Federal Reserve seems to believe the mandate to reach full employment is more important currently than the mandate to fight inflation.  They are probably right at this instant.  But unemployment is very much lower than a year ago and appears to be going lower.  Inflation on the other hand is heating up.  Inflation appears to have bottomed during 2013 and is now gently rising.  I believe they will reach their goal on employment and unemployment without further stimulus.  But, further stimulus greatly increases the chances of rapid inflation. 

Currently, Fed watchers believe the Fed will begin raising rates in July of 2015.  Some believe it could be as early as the spring while others are calling for the fall.  As the Federal Reserve Board Members discuss when to begin raising rates I hope they will consider how much inflation risk they have built in to the equation.  Falling gasoline prices might delay their decision too long.

As investors it is important for us to recognize that whether it is spring, summer or fall uncertainty and change are not favored attributes for markets.  Volatility, disappointment and opportunity are in the cards for next year.

 

©Regions Bank, Member FDIC.  The foregoing represents the opinions of the author, Brian Sullivan, and not necessarily those of Regions Bank or Regions Investment Management, Inc. (RIM).  RIM provides commentary to clients of Regions Bank, an affiliated company wholly owned by Regions Financial Corporation.  The information contained in this report is based on sources believed to be reliable but is not guaranteed as to accuracy and does not purport to be a complete analysis of the security, company or industry involved.  Neither the information nor any opinion expressed constitutes a solicitation for the purchase or sale of any security.  This report is designed to provide commentary on market strategy and the opinions expressed reflect the judgment of the author as of the date of publication and are subject to change without notice.  RIM assumes no responsibility or liability for any loss that may directly or indirectly result from the use of such information by you or any other person.  Investments discussed in this report are not FDIC-insured, not deposits of Regions Bank or its affiliates, not guaranteed by Regions Bank or its affiliates, not insured by any government agency, may go down in value, and not a condition of any banking activity.  Investment advisory services are offered through RIM, a Registered Investment Adviser.  RIM is wholly owned by RFC Financial Services Holding LLC, which in turn, is a wholly owned subsidiary of Regions Financial Corporation.

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