The Oil Threat
If history is any gauge of what might be in store for the future, then a recession spurred by high oil and gasoline prices could be right around the corner. I say that because every time we’ve had a significant spike in oil prices, it’s been a precursor to an economic downturn. I’m old enough to remember the oil shock of 1973 that sent the economy — and the stock market — tumbling. More recently, in early 2008, we saw oil prices surge to $140 per barrel and gasoline prices rise above $4 per gallon.
The 2008 oil spike was followed by one of the worst economic downturns in U.S. history. Although oil and gas prices were only part of the equation that led to the 2008 recession and subsequent market collapse, the bite high energy costs can take out of an economy –and out of corporate profits — cannot be denied.
Conversely, when oil prices fall drastically we usually see the economy and the markets spike. This situation was the case in the late 1990s when oil fell to $12 per barrel. In 2009, oil prices fell to $40 per barrel, after hitting that $140 peak in 2008. The low cost of oil and gas ignited a big rebound in the equity markets that continues to this day.
It is my contention that if oil and gasoline prices stay at current levels, and/or if they go significantly higher from here, it could be the catalyst for a big pullback in the economy and the stock market.
So far, stocks essentially have ignored higher oil and gasoline prices. That resilience clearly can be seen by the bullish chart pattern (see above) of the S&P 500 Index. But how long can this avoidance of reality last?
The answer to this question remains open; however, experience tells us that those who cannot remember the past are condemned to repeat it.
Jim Woods is a 30-plus-year veteran of the markets with varied experience as a broker, hedge fund trader, financial writer, author and newsletter editor.
His books include co-authoring, “Billion Dollar Green: Profit from the Eco Revolution,” and “The Wealth Shield: How to Invest and Protect Your Money from Another Stock Market Crash, Financial Crisis or Global Economic Collapse.” He’s also ghostwritten many books and articles, as well as edited content for some of the investment industry’s biggest luminaries. Read more about Jim Woods.
