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Oil price fluctuations proving to be not as big a deal for investors

The S&P 500 is effectively less sensitive to oil price fluctuations than it used to be.

As published in the Minneapolis Star Tribune 5/17/2018.

Oil prices have surged nearly 50 percent compared to a year ago. Gasoline prices nationally are approaching $3 per gallon. And yet, the surge in fuel prices hasn’t proven particularly important to the stock market.

It wasn’t long ago that oil prices were the single biggest driver of U.S. equity prices. In January 2016, a worldwide oversupply of oil sent crude below $30 per barrel. At one point, prices fell nearly 30 percent in only 11 trading days. And as oil sank lower, so too did investors’ confidence.

The Dow Jones and S&P 500 fell more than 5 percent that month. The Nasdaq dropped nearly 8 percent. U.S. equity markets recovered and finished 2016 with double-digit annual gains. In other words, the bull market survived. Oil’s role as a driving force in the U.S. economy has not.

At the end of 2013, energy stocks represented more than 10 percent of the S&P 500. Today, that weighting is just above 6 percent. Put another way, energy stocks now have 40 percent less influence on the bench mark’s performance than they did then. No other S&P sector has diminished even half as much in that time.

The S&P 500 is effectively less sensitive to oil price fluctuations than it used to be, a point that was underscored last month. In April, crude oil rose 5.6 percent. The energy sector gained an astonishing 9.4 percent. All three major U.S. stock indexes, meanwhile, were basically flat. This lack of correlation could actually prove beneficial to American investors if economic sanctions against Iran and economic instability in Venezuela cause oil volatility to spike.

Higher prices at the pump do, of course, result in less discretionary income for American consumers. But with the U.S. economy running full steam ahead, rising gas prices represent less of a threat to consumer spending than they would in leaner times.

The greatest impact of sharply higher oil on the stock market could likely be the result of increased expenses for companies dependent on petroleum-based raw materials. Higher input costs typically reduce earnings, but similar to the financially strong U.S. consumer, American companies are well positioned to weather higher overhead thanks to the new lower corporate tax rates.

Other economic trends probably represent greater obstacles. Wage growth and low unemployment make it harder for companies to hire quality people. Rising interest rates make it more expensive to finance growth.

Energy prices, however, are not the driving force they used to be.

 

View the article on Startribune.com

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