Signs of an improving economy did nothing to shield stocks from oil’s freefall as the Dow Jones Industrial Average (INDU) had its worst week since 2011, volatility surged and fund managers said anxiety is building among clients and themselves.
More than $1.2 trillion was erased from global equities over the five days, as the drop in crude below $58 a barrel raised concern over the strength of the global economy. The Chicago Board Options Exchange Volatility Index, a measure of trader anxiety that has spent most of the year hovering about 25 percent below its historical average, jumped 78 percent as oil’s impact rippled through financial markets.
via Oil Freefall Gives Dow Worst Week Since 2011; VIX Jumps – Bloomberg.
Why this is important? Contrary to the opinion of the talking heads on TV, a sudden drop in the price at the pump is not a real boost to GDP. What the market has right is that the destruction of the U.S domestic oil and gas industry is a terrible thing for stocks. The money saved at the gas pump doesn’t create jobs and there is no multiplier effect. The build out of the U.S oil and gas industry has been the strongest engine of growth in the economy since the recession of 2008. That is probably over with $58 oil as much of the shale becomes uneconomic. You will soon see the layoffs and the overall job picture will worsen. That’s when you will see the multiplayer effect. The fact is people without jobs buy a lot less gasoline, even when the price is cheap.