Is Oil on the Rise A Bad Omen for Stocks?

With everyone talking about the Dow hitting the 10,000 mark, little attention has been paid in the business press to the creeping price of oil. Oil now stands at $78/barrel, up from its recession low of $35/barrel in December '08. As I wrote in a previous article entitled Analysis of Oil, Gold, Stock, and Deposit Returns Shows Capital Preservation is Key Strategy.

"When I was in banking school several years ago, I had an instructor who handed out a metrics sheet. The sheet followed twenty or thirty macro-economic indicators. These indicators, the instructor said, will give you a pretty good idea of what’s happening with the economy. For example, the instructor said that whenever oil got above a certain price range, there was always a recession. And if you looked at the price of oil and matched it to recessions you could see a strong link, I would even say correlation."

Look at the chart below. At $78/barrel oil is not near the spike levels we saw in the summer of '08 where went above $130/barrel. But at this level it is significantly higher than its been over the last twenty years. Notice also how the market and oil prices have been rising in tandem, feeding off the continued drop in the dollar. Indeed all assets prices, from stocks, bonds, gold, oil, etc. have been rising as the Fed pumps liquidity into the market.

But asset prices never rise in tandem for long. Oil's ascent is particulary pernicious because it has such a direct impact on the state of the economy. Riusing oil prices crimp consumers at the gas pump and also heating their homes. Higher oild prices also hurt businesses, who depend on it in manufacturing, transportation, heating, and more. Indeed, it's hard to imagine any kind of roaring economy with oil in the $80+ range.