MW A falling stock market may hurt the U.S. economy more than high prices at the pump
By Gordon Gottsegen
Indirect effects from rising oil prices could hurt consumer sentiment and spending
The average price for a gallon of gasoline rose over $1 in March
With the national average for a gallon of gasoline hitting over $4, Americans are definitely feeling pain at the pump. However, it may be the indirect consequences of higher oil prices that hit the U.S. economy the hardest.
The war in Iran has caused economic headwinds since the conflict began in late February. Much of this has to do with oil. About 20% of the global supply of oil goes through the Strait of Hormuz, which Iran has effectively closed.
This has caused the price of crude oil to climb, with global benchmark Brent (BRN00) going from about $70 a barrel at the end of February to $104 a barrel at the end of March. During the same period, the S&P 500 SPX dropped by over 5%.
While economists have already warned that a jump in gas prices could dampen consumer spending, one stock-market strategist has said that the decline in equity prices might have a bigger impact on the economy than one might think.
"Our belief is the wealth and 'CNN effect' will have a greater impact on consumer spend than prices at the pump." said Christopher Harvey, managing director and head of equity and portfolio strategy at CIBC Capital Markets.
"Consumer net-worth figures indicate equities account for more than 25% of total consumer assets, so a 5-10% equity slump is material," he added.
The "CNN effect" refers to the impact that round-the-clock news coverage has on policymakers to react to what's happening. In the context of American consumers, it refers to how headlines drive people to change their behaviors. Harvey said that academic research shows how constant exposure to negative economic news can reduce customer spending. With all the headlines about the war in Iran and rising gas prices, consumers may be nervous about what this means for their financial stability.
Read: Stocks aren't the economy. But they shape how consumers feel about the future - now more than ever.
On top of that, a declining stock market may influence consumer spending too, because of the "wealth effect."
This refers to the tendency for consumers to spend more when their assets - including things like their stock portfolios or homes - grow in value, even if their income levels stay the same. That's because people feel comfortable spending more money, and saving less, when they see the value of their assets grow - even if only on paper.
The opposite is true as well. People may be more likely to spend less if they see the money in their 401(k)s or brokerage account go down. According to research by Oxford Economics, every $1 decrease in wealth results in a 14-cent decrease in spending as measured by the Personal Consumption Expenditures index.
This decrease in spending has a ripple effect because the American consumer accounts for about two-thirds of the U.S. economy. In recent years, wealthy Americans have played a bigger role in propping up the economy. It's estimated that the top 10% drive about half of all spending.
Those same wealthy Americans own a larger portion of stocks, meaning they acutely feel the wealth effect when markets go down.
The influence of higher gas prices on consumer sentiment is still important. Economists consider gasoline to be inelastic, meaning that consumption remains mostly steady regardless of prices. As a result consumers may have to cut back elsewhere in order to pay for necessities.
But higher oil prices create a cascading effect throughout the economy. For investors, it may be wise to be aware of those secondary effects.
-Gordon Gottsegen
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(END) Dow Jones Newswires
April 01, 2026 16:34 ET (20:34 GMT)
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