Monday, February 27, 2012

S&P 500 and Oil Prices

So far, the surge in oil prices hasn’t depressed either consumers’ or investors’ confidence. The Thomson Reuters/University of Michigan final index of consumer sentiment for February rose to 75.3 from 75.0 in January. A measure of French consumer sentiment rose to 82 from 81 last month, national statistics office Insee said on February 23. South Korea’s sentiment index rose to 100 in February from 98.

The S&P 500 is up 8.6% ytd despite the 17.4% increase in the price of Brent so far this year. Higher oil prices aren’t necessarily bearish for the stock market, up to a point. There has been a very strong positive correlation between the two since the second half of 2008. That’s partly because the Energy sector accounts for 12.3% of the market capitalization of the S&P 500. Moreover, the S&P 500 Energy sector tends to outperform (underperform) the S&P 500 when the price of oil is rising (falling).

However, as the saying goes in the commodity trading pits: The best cure for high commodity prices is high commodity prices. The risk for stocks is that the price of oil spikes to a level that depresses the global economy. Oil prices would then tumble as they have every time oil prices spiked in the past. Stock prices would probably follow suit.

In the past, oil price spikes preceded recessions as in 1973, 1979, 1991, 2002, and 2008. The one exception was last year’s spike. I think this year’s spike will be the second exception. That’s because I expect that there will soon be some relief on the upward pressure on oil prices if governments with Strategic Petroleum Reserves tap them. Furthermore, the US labor market has been improving significantly in recent months. Initial unemployment claims averaged 354,300 during the first three weeks of February, down from January’s average of 377,250. This suggests that payroll employment rose this month by at least as much as January’s 243,000 gain. (More for subscribers.)

No comments: