With the price of gas rising sharply these last six weeks, a lot of folks are wondering how much higher it can go. The pain at the pump is real—I have personally noticed about a $1.50 per gallon increase in the price of gas throughout the Reno-Tahoe region.
Gas, of course, is only one of the many prices affected by oil. Increases in fertilizer costs make it more expensive to grow crops. Increased diesel costs make construction more expensive. Transportation of goods increases as well when fuel prices go up, so any good that is shipped or transported could cost more as a result.
A less obvious question, but an important one for investors, is: what happens to the stock market when oil prices go up?
Many people assume that rising oil prices automatically mean falling stock prices. In some cases that has been true, historically speaking. Yet I would argue that there is more nuance to this question.
During periods of economic expansion—when the economy is growing and thriving—we often see an increase in demand for oil products such as gasoline, diesel, and jet fuel and therefore an increase in price. This price increase is happening exactly when companies are doing well, growing, and are likely to be increasing in value. In these cases, we might expect to see stock prices increasing while oil prices increase. A perfect example of this would be the years from 2003 to 2007, when the price of oil more than doubled and the S&P 500 produced strong annual gains during that period.
Conversely, “oil shocks”, or extreme spikes in price, often precede market downturns. From 1998 to 2000, oil prices nearly tripled during the same period that stock valuations became extremely stretched before the dot-com crash, and the S&P 500 lost about 50% of its value over the next 2 years. Leading up to the Financial Crisis in 2008, oil prices again tripled, this time over a 5-year period. This added pressure to an economy already facing financial stress. Once again, the S&P 500 dropped approximately 50% from its high. More recently, oil prices surged in the post-pandemic recovery before a bear market hit in 2022.
History gives us patterns, but not guarantees. Today, we are left to guess how rapidly our rising oil prices will impact the stock market. At the moment, things do not fit neatly into one of the scenarios above. While the price of oil has increased dramatically in a short time, we are far from seeing the price triple. We also don’t know what comes next. Will war in the Middle East continue, pulling with it the price of oil and a possible recession? Will we soon see a peace agreement, the reopening of the Strait of Hormuz, lower oil prices and rapid gains on the stock market?
Moody’s Analytics chief economist Mark Zandi thinks that a $125/barrel average oil price for the second quarter could be enough to trigger recessionary pressure. Meanwhile, Richard Moody, chief economist at Regions Financial, says that “how persistent higher energy prices are
is just as important as how high energy prices rise.” According to his research, the sooner that that the current conflict in Iran ends and oil prices fall, the better the odds that we can avoid a recession.
In the end, it’s hard to predict the future, so we won’t know how the current surge in oil prices will impact the stock market over the longer run. As always, my best advice is to invest in a way that matches your goals, timelines and risk tolerance. Be prepared for the inevitable ups and downs of the market, and resist the urge to sell when the market goes down.
However you choose to handle the high price of oil, invest smartly and invest well!
Larry Sidney is a Zephyr Cove-based Investment Advisor Representative. Information is found at https://palisadeinvestments.com/ or by calling 775-299-4600 x702. This is not a solicitation to buy or sell securities. Clients may hold positions mentioned in this article. Past Performance does not guarantee future results. Consult your financial advisor before purchasing any security.
