Crude oil’s sudden 4.3 percent jump to $27.32 in midday trading was the boost that Wall Street was looking for as investors swooped in and traded shares up.
The Dow Jones Industrial Average leapt 290 points, or 1.8 percent, to 16,174 while the broader S&P 500 gained 1.5 percent to 1,187. U.S. retail stocks were in the green with the S&P 500 Retailing Industry Group Index posting a 1 percent gain to 1,187.
Some of the top gainers in the fashion apparel, retail and beauty segments included: Men’s Wearhouse Inc. with a 7.4 percent jump to $12.75; Avon Products Inc. with a 9.2 percent increase to $2.85; Joe’s Jeans Inc.’s 9.2 percent gain to $0.21; Iconix Brand Group Inc.’s 10.1 percent jump to $6.42; Coach Inc. with a 10.6 percent gain to $33.56, and Vince Holding Corp.’s 18.7 percent increase to $4.83.
The importance of rising crude oil was outlined Monday in a report from Goldman Sachs analyst Jerry Revich, who downgraded shares of heavy equipment manufacturer Caterpillar Inc.
What has spooked investors is Revich’s and other economists’ views on global infrastructure investments, which have decelerated as commodity prices deflate. Revich said the global economy was in a deflation cycle, which was also echoed in several retail reports last week.
A deflationary trend on the retail side of the market is bad news. But when business sectors that pay higher wages such as energy and the industrials suffer deflation, the impact on economies driven by spending on goods and services could turn catastrophic.
Revich said during the “last commodity deflation cycle, which began in 1983, performance didn’t turn until commodity investment started to recover in 1993 when upstream investment improved 23 percent on a year-over-year [basis] — 10-plus years after the peak.”
“Given the significant supply build-out in the current cycle, our in-house view remains for an extended multiyear commodity deflation cycle that could be similar to that of the 1980s and early 1990s,” he said.
Revich said to mitigate the impact, global mining and oil needs to rebalance from a supply and demand perspective, which would stabilize crude oil prices. He also said a weaker U.S. dollar would help.