When gas prices at the pump hit $4 a gallon last summer, the pain felt by restaurant operators was severe. While we are miles away from that level, the surge in oil prices and subsequent move in gas prices should not be overlooked.
Last week pump prices increased to a new national average of $2.17 a gallon and are up $0.12 over the past month. The good news is that prices are still $1.47 a gallon cheaper than last year.
There is a view that oil could have a meaningful upside as the re-flation trade continues to play out, especially with a weakening dollar. In early trading today, Oil prices traded above $59 a barrel to set a new six-month high, mainly in response to the positive tone to equities and a weaker dollar.
At some point, the sequential rate of change (week to week and month to month) will begin to impact the consumer somewhat more than the absolute year-over-year decline.
Currently, the psychological behavior associated with the rate of change has not been evident is sales trends at Wal Mart, which is a proxy for consumer behavior as its sales trends have a high R-squared to changes in gas prices. Although, it should be noted that the Consumer Discretionary (XLY) has now begun to underperform and appears to be in a correction phase; over the past week the XLY is up 0.3% versus 2.4% for the S&P 500.
With Full Service valuations surging over the past two months, sales trends that remains under pressure, and higher gas prices, it’s not the right time to be a Full Service BULL!