Life as an investor has been very different since the Great Recession — and I did not anticipate the large drop in oil prices this year. Oil price decline will have so many knock-on effects (good and bad) that it is difficult to understand the timing or intensity of the effects.

Many pundits are pointing to increased consumer buying on the back of reduced oil prices. I believe reduced oil prices will have the opposite effect on many non-retail business which will end up offsetting (how much is the question) the positive retail growth. The offsetting factors are out of phase with with increased consumer spending. I expect the effect of the offsetting factors to begin to set in during the first half of 2015.

In any event, consider that headline GDP is determined relative to the previous quarter. Once the increased consumer spending GROWTH bump occurs — IF oil prices remain the same — the growth in the following quarter will fall back to the current trend. And what happens if oil prices rise? Oil prices must continue to fall for any GDP GROWTH benefit to continue for the USA.

My belief is the market is over-valued relative to the business cycle. One reason the market reacted positively to the drop in the price of oil is that the Federal Reserve said it will have a positive effect . Fed Chair Janet Yellen stated during her post-December FOMC Meeting Press Conference:

…. that the decline we have seen in oil prices is likely to be, on net, a positive. It's something that's certainly good for families, for households. It's putting more money in their pockets. Having to spend less on gas and energy, and so, in that sense, it's like a tax cut that boosts their spending power. The United States remains — although our production of oil has increased dramatically, we still remain a net importer of oil. Of course there may be some offset in the form of reduced drilling activity, and possibly some change, some reduction in cap-ex plans in the drilling area. But, on balance, I would see these developments as a positive for the standpoint of the U.S. economy.