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
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.
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; I wrote over a month ago, a piece (with the remarkably similiar title) "Stop Blaming Oil!" that noted both Oil and the Nasdaq have doubled since October 2002. 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 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, 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"
Stop Fretting About Oil
Kenneth L. Fisher, Portfolio Strategy
Forbes, 08.15.05, 12:00 AM ET
Stop Blaming Oil!
Barry L. Ritholtz
Monday, June 27, 2005
with Ray Dalio, Chief Investment Officer, Bridgewater Associates
WHEN YOU MANAGE NEARLY $120 billion in institutional
assets and your hedge fund provides consistent returns of about 15%, after fees,
on average, every year for nearly 16 years running, who wouldn’t want to hear
your views on the economy? Dalio, founder of Westport, Conn.-based Bridgewater
Associates, has built an organization renowned for its penetrating analysis of
world markets and its ability to seize investment opportunities among different
asset classes, particularly the credit and currency markets. Clients gain access
to Bridgewater’s latest thinking on global markets through the firm’s Daily
Observations newsletter. We thought you might like to get the scoop straight
from the horse’s mouth.
Barron’s: What’s your outlook for inflation?
Dalio: I think inflation is gradually trending higher.
It won’t emerge as a threat probably until late 2006. World economies are late
in the economic cycle, and there are not the same excesses there used to be. The
dollar will go down a lot and commodity prices will go up a lot. There is a
structural surplus of labor and there’s disinflation from labor and manufactured
goods and productivity, but commodity inflation will offset that. The rate at
which this will occur will be gradual at first, and as we get later into 2006
we’ll have run out of slack and there will be more of a depreciation in the
value of the dollar and more appreciation in commodity prices and the Fed will
lag that move. Real rates will be relatively low.
You’re not concerned the Fed tightens too much?
No, I don’t believe they will tighten too much. Rates will
continue to rise and the Fed will continue to tighten, but their moves will lag
the forces of positive economic growth, a declining dollar and rising commodity
prices. The Fed is looking at general inflation, and that will rise slowly. The
economy is growing at a moderate pace, and so any tightening will be
comparatively slow and modest. The balance- of-payments issue is a major issue,
but it is not going to be a major problem this year. This year will be the first
attempt to remedy the problem, but what is going to happen is our
balance-of-payments position is going to worsen a lot. In 2005, 2006 and 2007 we
are going to see our current-account deficit go from 5½% to 6½% to 7½% of gross
domestic product. Our need for foreign capital is going to continue to grow at
the same time that China’s desire to buy our bonds — and Japan’s to some
extent, as well — will diminish. China’s desire to have an independent monetary
policy will be a driving factor. But there is a bipolarity in the world: The
mature industrialized countries are in relative stagnation, and the big reason
the U.S. is growing faster than most of other countries is because we are being
lent capital. We are substantially dependent on foreign lending.
To put that in perspective, we import about 65% more than we
export. Then there are the emerging countries. These countries, with their
economic booms, are running current-account surpluses and are net lenders to the
developed world. This is a very, very healthy set of circumstances. Emerging
countries are using their capital to pay down their debts, and they are buying
the U.S. Treasury bonds to hold their own currencies back. There is a very
favorable structural shift in wealth to developing nations. We are very, very
bullish on emerging countries, particularly Asian emerging countries and their
currencies. Fundamentally, though, you have to ask yourself whether the ties
between us and the emerging countries that are buying our bonds will last. It
doesn’t make sense. The balance-of-payment situation reminds me very much of the
Bretton Woods breakup in 1971.