We should briefly review our Oil views, since Crude has been in the news so much lately. My thesis about Oil and the Markets has, for quite some time now, been that the economic reinflation engineered by the Fed stimulated economic growth, and with it, demand for Oil. US Consumer spending is part of the reason China came online so strong, further accelerating Oil demand. All that was good for stocks, but only up until a point: Beyond a certain price, its a negative for equities.
As we noted in Stop Blaming Oil!, on the one hand:
"Since October 2002, Oil has doubled, and with it the
Nasdaq. The inverse correlation many seem so found of blaming the Market’s woes
upon seems to come and go with such irregularity that we hardly find it
instructive to quote Oil as the basis for the selling."
Sorry to be a two handed economist but, on the other hand:
"It would be silly to suggest that Oil’s price action is
irrelevant to stocks for one simple reason: Most of the major post war
recessions were preceded by a spike in Oil prices. The period leading
up to and through each recession were bad for equities."
Which leads me to the cliché:
"So to proclaim that Oil has absolutely no impact on stocks is both factually incorrect, and potentially dangerous. There is a tipping point
for Oil and the Economy — we have yet to cross that level — but once
we do, you can be sure that Oil will impact equity prices."
Where is the tipping point? I tihnk markets are "used to" $50 oil, uncomfortable at $60, and unpleasant over $65, and downright ornery over $70. You can see this reflected in last week’s performance data:
(Kudos to the Journal for slipping in the subversive reference to the soft core user created content site, HOT or NOT. I love pop culture references that goes over most people’s heads).