For 18 months, we have all heard about the so called oil dividend to consumers – the benefit to consumers’ pocketbooks as a result of a plummeting oil price. Graph 1 illustrates the decline in oil price from a peak of $107.26 per barrel on June 20, 2014, to a low of $26.21 on February 11, 2016. The precipitous fall in oil led to gasoline prices going from above $4.00 per gallon to a low of around $1.50. Commentators believed that this difference would create a significant savings to consumers that they would redeploy into the economy. We have not seen this redeployment or the associated benefit to retailers and other consumer driven businesses.

One reason for this seems to come from the increase in healthcare expenditures. CLSA and the Bureau of Economic Analysis provided Graph 2 below, which depicts the year-over-year dollar increase in personal healthcare and insurance consumption. That the US never experienced a year-over-year decline in healthcare costs between 1997 and today jumps off the page, especially given technological advances, etc. Additionally, the recent dollar spending growth seems to have risen significantly around the time of open enrollment related to the Affordable Care Act at the end of 2014.

We also see the continual year-over-year increases in healthcare spending in the Bureau of Labor Statistics’ reporting. Table 1 lists personal gasoline and motor oil spending as well as health insurance spending. The BLS report, published in September 2015, does not include figures for 2015, but we can see the effect and presume a similar effect in 2015 as a result of the healthcare spending increase in Graph 2. You can see that the approximately $600 annual household increase in health insurance spending dwarfed the $288 annual household savings from gasoline between 2012 and 2014. By 2014 the average US household spent $400 more on health insurance than it did on gas, when in 2012, the average US household spent almost $700 more on gas than on health insurance.

Therefore, the oil dividend appears to have been consumed by the rising cost of healthcare and health insurance. When you couple this with the millennial demographic statistics, which we have shared with you in the past, you find a difficult investment environment for consumer discretionary oriented companies. We have chosen, in part, to stay out of retail related investments due to this phenomenon. Companies in the consumer discretionary space really have to get the product or service right to show strong operational metrics. We continue to look for those companies. Similarly, the disappearing oil dividend suggests that we should look at companies whose business reduces healthcare costs. We continue to look for those companies as well. As with most of the research we do, all of the figures and charts above represent an interesting and varied set of investment opportunities.

Thank you for choosing Darrell & King to protect and grow your assets!