Interest Rates & Gas Prices

The big news today was the government bailing out AIG and the news on the financial sector, aka Wall Street firms.

The most important business news was a $0.11/gallon drop in gas price futures and low interest rates. So in 2 days the price of gas futures has dropped $0.33/gallon, even after Hurricane Ike and the closing of refineries.

Why is this important? It means that the normal business cycle works and both events are very positive for the equity, aka stock, markets in the US and Internationally.

As interest rates drop, fixed income investments such as bonds are less attractive meaning that money will tend to migrate to the equity markets. Lower interest rates are typically positive for the long term prospects of the equity markets. No investor wants to get a return on an investment that is lower than the inflation rate because you automatically lose money.

As gas prices drop, consumers will have more money to spend putting money into the economy. This is positive for equities that correlate with the economy. The effect of lower energy prices will have a much bigger impact on the economy than the recent stimulus checks.

If you listen to the news and the financial information on the financial sector bailout, you just might be scared and tempted to sell all equities and put money into a money market account. This is probably not the best move.

The financial sector is unwinding and getting back to reality. Interest rates and energy prices are getting back to normal. These 3 points are favorable from a long term perspective for the equity market.

Shut off the news and relax.