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Ken Fisher is (kinda) Wrong about Oil

Posted By Barry Ritholtz On August 1, 2005 @ 6:43 am In Commodities,Economy,Investing | Comments Disabled

I was surprised to see this bit of misinformation in Forbes:

"Data-mine all you want. You’re not going to find a credible cause-and-effect relationship between oil and stocks.

Have you allowed yourself to be scared out of the stock market by high oil prices? If you have, you’re making a big mistake. You are falling prey to a media myth. It’s fascinating how often the media get away with a story claiming X causes Y when an abundance of statistical evidence exists to disprove the connection. It is routine now to see stories blaming a drop in stock prices on a rise in oil prices. Don’t believe these stories. There’s no connection between the two."

-Kenneth L. Fisher
Stop Fretting About Oil [1]

That’s an oversimplification which is a bit misleading. If you are only discussing the day-to-day gyrations of stock prices, than that’s almost true.

It would be more accurate to say that the psychology of the moment — a very viscous and volatile phenomenon — is the filter that all these other causative factors pass through. Its why markets sometimes shake off high Oil prices (or Terror or whathaveyou), and sometimes swoons in front of them.

All the varied factors contributing to the Market’s Gestalt at any given time is what makes equity prices either sturdier or more vulnerable. Note that on prior occassions, we have  addressed the folly of trying to control for a single variable in market correlation [2].

This is not a new subect area for me: As we stated last week, Oil’s day-to-day gyrations are fairly irrelevant to daily stock prices [3]; I wrote over a month ago, a piece (with the remarkably similiar title) "Stop Blaming Oil! [4]" that noted both Oil and the Nasdaq have doubled since October 2002 [4]. Hardly a negative correlation.

However, 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.

So to proclaim that Oil has absolutely no impact on stocks is both factually incorrect, and potentially dangerous. There is a tipping point [5] 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.

Also of note
:  Fisher’s column  has this bit of advice: "Buy good stocks and hold them." 

Now all we need is a definition of what’s a good stock, how long to hold them, and a way for Human Beings to avoid dumping them at the worst possible moment [6], and we’ll be set . . .


UPDATE August 1, 2005 10:03am

S&P’s Sam Stovall breaks down Oil’s impact, sector-by-sector, in Business Week: "Where Oil-Price Spikes Hurt — and Help" [7]


Stop Fretting About Oil [1]
Kenneth L. Fisher, Portfolio Strategy
Forbes, 08.15.05, 12:00 AM ET

Stop Blaming Oil! [4]
Barry L. Ritholtz
Monday, June 27, 2005

Article printed from The Big Picture: http://www.ritholtz.com/blog

URL to article: http://www.ritholtz.com/blog/2005/08/ken-fisher-is-kinda-wrong-about-oil/

URLs in this post:

[1] Stop Fretting About Oil: http://www.forbes.com/forbes/2005/0815/102.html

[2] single variable in market correlation: http://bigpicture.typepad.com/comments/2005/05/single_vs_multi.html

[3] irrelevant to daily stock prices: http://bigpicture.typepad.com/comments/2005/07/gyration_causat.html

[4] Stop Blaming Oil!: http://bigpicture.typepad.com/comments/2005/06/stop_blaming_oi.html

[5] tipping point: http://www.amazon.com/exec/obidos/ASIN/0316346624/thebigpictu09-20

[6] worst possible moment: http://bigpicture.typepad.com/comments/2005/07/apprenticed_inv_2.html

[7] "Where Oil-Price Spikes Hurt — and Help": http://www.businessweek.com/investor/content/aug2004/pi20040811_6725_pi039.htm

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