Stocks surged Tuesday, one day after a sell off, thanks largely to oil touching a 7-week low price point. In New York trade, light sweet crude oil futures dropped $2.54 to a close of $122.19. Not only is this a nearly two month low, it brought the recent oil slide to about $25 in just two weeks, from a record high over $147.

The enthusiasm over the prospect of lower energy prices has driven sentiments in both investment markets and with consumers in recent weeks. Unlike previous dips in oil, the current slide has been swift, convicted, and maintained. Investors seem torn between focusing on financial sector concerns, or the dropping energy prices, as evidenced with the 180 degree swing in equity trading from Monday to Tuesday. Consumers seem a bit more positive now that oil has receded, bringing retail gas prices down as well. This was evidenced by the slight gain in consumer confidence from May to June. Today’s index reading was 51.9, up from 51 in May.

Analysts seem more confident that oil’s drop as part of a shift in price momentum. Several times in the last few months, oil has dropped sharply by $10-12, only to see a quick move higher. The current slide has held prices down and attempts at a rebound higher have been minimal. Increased supply, reduced demand, and a lack of significant Middle East political tension has contributed to the turnaround.

In synch with the oil and gas drop (gas fell to $3.941 Thursday, according to AAA, nearly twenty cents from hits high), the dollar has pushed higher. It is sometimes hard to tell whether the dollar rise is impacting oil or vice versa. However, given the financial sector concerns, inflation problems, and other economic uncertainty, it seems pretty evident that the present dollar improvement is being helped by the oil factor. The dollar typically moves inversely with oil since the US is dependent on foreign oil. Thus, if oil demand and prices drop, the US dollar becomes more valuable relative to the natural resource.

The dollar surpassed 108 yen today in New York trade, a point unseen for a couple months. The dollar had passed this mark in the late spring before another dip to around 104 yen. One dollar currently nets 107.97 yen. The dollar also pushed back the Euro, which had reset a record high over $1.60 a few weeks ago. One Euro currently nets just below $1.56.

Despite the positive vibe on Wall Street today there was some very disturbing data on the housing front. The private Standard & Poor’s/Case Shiller home price index showed record losses in May for both the 10-city and 20-city indexes. The 20-city index dropped 15.8 per cent this May compared to May 2007, while the narrower 10-city index fell 16.9 per cent. The 10-city drop was its biggest in the index’s 21 year history. The 20-city index saw its worst decline since it was developed in 2000.

May was also the second month in a row that none of the 20 cities in the larger survey had seen price appreciation from the previous year. Additionally, home values have dropped 18.4 per cent since the index reached its high point in July 2006. This demonstrates just how abruptly the real estate sector has gone from boom to bust. Although the government has attempted to intervene to help the credit and housing sectors, it might be freed up cash from falling oil, gas, and food prices, along with improved consumer confidence, that helps produce home buyers.

Market Recap

Stocks were splintered Monday. The Dow led the way with a stiff 239 point drop. The NASDAQ and S&P were down 46 and 23 points. There were not any major catalysts for the movers but several news and notes prompted a return to anxiety about the financial sectors near future. Tuesday saw a prompt and convicted rebound as the Dow jumped 266 points. The NASDAQ and S&P were up 55 and 28. A 7-week low in oil and rise in the dollar helped encourage investors. On the downside, home prices fell by a record 15.8 per cent during May, according to the S&P. Consumer confidence rose modestly in June.

Neil Kokemuller
Tuesday, July 29, 2008
10:34 PM EST

Neil Kokemuller is an Associate Professor of Marketing at Des Moines Area Community College in Des Moines, Iowa, USA. He has a MBA from Iowa State University.

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