Falling Gas Prices Fuel Market Rally

There is nothing quite like dipping gasoline prices to boost the US stock market. A lot of things have changed since August 2, when gasoline futures hit a 2006 peak of about $2.34 a gallon on the New York Mercantile Exchange. The prices of gasoline fell 75 cents through the middle of this week. In the stock market, the S&P500 Index jumped 8.6% and the Nasdaq Composite Index climbed more than 13%.

Indeed, a few other things have been going on at the same time, including indications that the Federal Reserve is finished increasing short-term interest rates for the foreseeable
future. And experts of the market keep telling us that changes in energy prices don’t pack as much of an economic wallop as they did a few years ago.

All the same, a break at the pump can still energize investors’ sprits. The investment firm UBS AG says that in the past two months, its UBS/Gallup index of investor optimism has climbed 26 points to 79, concurrent with a fall in the number of investors worried about the economic impact of energy prices.

When the price of oil topped $78 a barrel in July, the sense of strong upward movement was almost obvious. Speculations swirled that oil price was headed for $100 a barrel. Instead, what happened was a change of direction that caused pain on large and small investors alike. Some well?known hedge funds came away bleeding with energy-inflicted wounds.

While most other stock mutual funds have rallied smartly, Morningstar Inc. data show natural-resources and precious-metals funds with minus signs in the past three months. Many arguments can be made for holding a natural?resources or other commodity-related fund as part of a diversified investment plan. Having a stake in energy investments can serve as a nice offset in case rising fuel prices hit the family budget. Quite possibly hordes of commodity bulls are correct that fast growth in China and India will increase demand for energy and industrial commodities for year to come.