The conventional wisdom is that high oil prices are bad for the economy and stock market. They hurt consumers’ ability to spend.
But there’s more nuance to that, and the stock market could be just fine.
WTI crude oil has gained about 17% to $91 a barrel from a low point in mid-August. Recently, a lower rate of broader inflation has made the Federal Reserve more likely to be at the end of its interest-rate hikes, something that can support economic demand. Demand has already held up fairly well of late, with retail sales in August up 2.5% year over year, even while many fear that a recession is on the way.
Now oil is at a level it hasn’t seen since January 2022 and that could be a problem for consumers. It means higher gas prices and less room in people’s wallets to spend money, ultimately hurting economic growth.
Sometimes, such high oil prices dent the stock market. It might even seem as if that’s the case right now, with the
S&P 500
down about 3% since the start of August.
But the minor drawdown might just be that—a pause from what has been a double-digit-percentage rally this year. The fact that higher oil has coincided with a lower stock market doesn’t mean they’re related.
“Correlation in this ongoing equity-market correction is not, however, always causation,” writes Evercore strategist Julian Emanuel, explaining that higher oil prices aren’t necessarily a major problem for the stock market.
He uses historical precedent. From 2010 through 2014, oil went from about $70 a barrel to over $100, while the S&P 500 gained roughly 50%.
The reason is because higher oil prices often coincide with strengthening consumer demand and a robust economy, which powers corporate profits higher. In the 2010 to 2014 stretch, the economy was growing and consumer confidence rose from a reading of about 65 to around 80. So far this year, it’s risen from around 95 to just over 100.
Sure, higher oil prices alone make things harder for consumers. But when they’re rising, sometimes it means more people are getting hired, earning increased incomes, and generally feeling more confident about their ability to spend.
Rising oil prices can coincide with a rising stock market. That scenario remains a possibility going forward.
Write to Jacob Sonenshine at [email protected]
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