On Tuesday, July, crude oil collapsed very sharply, down more than 10% near the lows, in an aggressive breakdown of the price. The $97.43 lows reached that day were 14% below recent highs (set on June 29) and more than 21% under highs set on June 14.
Consumer Discretionary Spending Likely To Fall Further
In a recent research article (published June 9, 2022: CRUDE OIL PRICE AND CONSUMER SPENDING – HOW THEY ARE RELATED), we shared a similar breakdown that took place in crude oil in 2009 and how tightening consumer spending often correlates with peaks in crude oil when crisis events happen.
Within that research article, I shared this chart highlighting the collapse in the consumer discretionary sector that preceded the downward collapse in crude oil. The interesting facet of this chart is we can see the inflationary price pressure in crude oil (and the general economy) countered by pressures put on consumers in the lower iShares US Consumer Discretionary ETF (NYSE:IYC) price chart.
Consumers Lead Global Economy – Watch IYC Closely
As prices rise, consumers are put under extreme pressure to keep their normal standard of living. As inflationary pressures continue, consumers make necessary sacrifices to manage their budgets – often going into debt in the process.
Eventually, this cycle breaks, and inflationary trends end. This is clearly evident on the chart below in July 2008 – as IYC, the consumer discretionary sector, collapsed by more than 27% before crude oil finally peaked and broke downward.
Since November 2021, IYC Has Fallen More Than 37%
This current weekly crude oil and IYC chart shows IYC has collapsed by more than 37% from the November 2021 highs – well beyond the 27% collapse in 2008 that preceded the 2008-09 global financial crisis event. Is the current collapse in IYC a sign that a broad global crisis event has already begun to unfold beneath all the news and hype? Will crude oil collapse below $75ppb as the global economy shifts away from inflationary price trends and bubbles burst?
The Deflationary Price Cycle Is Not Over Yet
If IYC falls below $55 in an aggressive downward price move, I would state the risks of a global deflationary price cycle (or extended recession) are still quite elevated. Currently, the $55 price level in IYC aligns with early 2019 price highs and reflects an extended price advance from the $12~$15 IYC price levels in 2008-09.
If the $55 IYC price level is breached to the downside, I expect the $37.50~$40 price level to become future support – as that price level reflects the COVID-19 event lows.
Still, these lower price targets represent an additional 32% decline in IYC and reflect a total of a 57% collapse in the consumer discretionary sector from the November 2021 peak levels. The potential target range of $37.50~$40 correlates with the 2008-09 global financial crisis collapse range when IYC fell from $18 to lows near $8 (nearly -57%).
We are still very early in the shifting deflationary cycle phase after the Fed started raising interest rates.