How the Unpredictable Cost of Travel Fuel Is Impacting the Market

How Rising Gas Prices and Fuel Costs Impact the Market

Filling up your tank and seeing the higher prices may have you remembering the energy crisis of the 1970s. Because high energy prices reverberate across so many parts of the economy, it’s logical to wonder how rising costs will ultimately affect stock market performance.

This piece will examine how past gas price spikes have impacted equity markets and what portfolio moves you can consider to help you handle market swings.

Why Gas Prices Are So High

High gas prices often slow the economy. But to better understand what could happen with the stock and bond markets, it’s worth examining why fuel prices are so high at this time.

As many of us resume traveling and working in the office after two years of pandemic shutdowns, demand for energy—including gas, diesel and jet fuel—is rising.

Also driving the need for fuel is the increase in transportation and shipping activity as companies move to meet consumer and business demands. Unfortunately, large oil and gas providers haven’t increased production to meet the demand, while the oil-producing countries that comprise OPEC+¹ have been slow to bring more oil reserves to the market.

Russia’s invasion of Ukraine is also roiling world energy markets and driving prices higher, as Russia supplies about 10% of the world’s oil. Though we can’t predict where fuel prices will go from here, in the near term (mid-2022), prices are likely to remain elevated or rise even higher as the summer travel season and road trips increase demand for gas.

What High Fuel Costs Mean for the Economy

Higher fuel prices are sparking a series of consequences that can ultimately drag down the stock market.

Fuel prices move through the economy, affecting consumers and businesses alike, increasing the price of many goods and services. As a result, inflation is reaching heights not seen in decades, driven by increased consumer demand for goods and services coming out of the pandemic and driven by higher fuel prices pushing up costs.

High Gas Prices and the Stock Market

Based on history, if high gas prices and related inflation do tip the economy into recession, stock prices may fall. Still, market declines during recessions range from mild to more severe. For example, the S&P 500® Index fell approximately 14% during the recession of 1990–1991 but plunged about 46% during the 2008 financial crisis.²

Though each period in time has its own unique factors in addition to high oil prices (and past performance is no guarantee of future results), analyzing how the market reacted during past oil shocks can be informative.

Based on these past oil shocks and related market declines, it may be easy to assume that high oil prices always lead to a recession and market decline. But, surprisingly, sometimes stocks fall when gas prices decline. One possible explanation is that investors fear that declining energy demand from consumers and businesses is a sign of economic weakness.⁵

Even if the market continues its current decline, the pain may not be felt equally, as the stocks of firms in specific industries may be more affected than others.

For example, airlines have to continue purchasing jet fuel even as prices rise. Although they can often pass those costs on to consumers as higher ticket costs, there’s a point where would-be travelers may balk at those rates. And many retailers are reporting slowing profit growth as consumers cut back on discretionary spending or choose lower-margin options when they purchase goods.

Portfolio Considerations for Higher Fuel Prices

It can be tempting to invest in the energy sector as gas prices rise. Generally, investing across multiple asset classes and sectors is a prudent approach in the current market environment. Also, if you own a diversified stock fund or index fund, you likely already have energy exposure in your portfolio.

Remain Disciplined in the Face of Higher Fuel Prices

Seeing your heating and gas costs rise while experiencing market volatility can be unnerving. One way to manage the stress is to remain disciplined and avoid reacting to short-term market swings.

Consulting with experienced investment professionals can also help you feel more confident about your investment decisions—not only when gas prices are surging, but anytime.