Investors may feel the effects of high oil prices in their stock holdings as well as their fuel bills. The latest spike in crude-oil futures...
NEW YORK — Investors may feel the effects of high oil prices in their stock holdings as well as their fuel bills.
The latest spike in crude-oil futures, which now hover above $56 per barrel, sent stocks tumbling this past week as investors, rightly so, feared that price hikes could soon ripple throughout the economy and trigger inflation.
Yesterday, the Dow Jones industrial average rose 3.32 to 10,629.67, after falling more than 69 points in late trading before recovering at the close.
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Microsoft, one of the 30 Dow stocks, fell 23 cents yesterday to close at $24.31 a share, and ended down 3.1 percent for the week. Boeing, also a Dow stock, gained 27 cents to $57.16 yesterday, but was down 0.6 percent for the week.
Broader stock indicators lost ground. The Nasdaq composite index lost 8.63 to 2,007.79, its worst finish since Nov. 3. The Standard & Poor’s 500 index was down 0.56 at 1,189.65.
For the week, the Dow fell 1.34 percent, the S&P was down 0.87 percent, and the Nasdaq lost 1.66 percent. The Nasdaq is down 7.7 percent for the year to date.
Oil prices climbed higher yesterday, with a barrel of light crude settling at a record $56.72, up 32 cents, topping the previous closing high of $56.46 set Wednesday.
Rising oil prices pressure every sector of the stock market, except for energy stocks. And if the Federal Reserve raises interest rates more rapidly to combat the inflationary threat, economic pressures could also drive stocks lower.
The various scenarios leave few places for portfolios to hide. And sadly, hoarding Dubai crude futures isn’t the answer.
“The first thing you have to wrestle with is whether this move higher in oil prices has persistence,” said James Abate, investment director at GAM Fund Management. “You shouldn’t do anything until you can find an answer that you can live with.”
Barring any abrupt disruption of oil supplies — a terrorist attack on oil facilities is one of the market’s fears — oil prices are likely to peak in the short term. Of course, the problem with the short term is that it could be anywhere from a week to six months away.
Some investors may want to jump into oil stocks, given their amazing track record over the past three months, even if it’s just for the short term. The problem with that, analysts said, is that nobody knows when, or if, oil prices will come crashing down.
“It’s the classic investor mistake,” said John Lynch, chief market analyst at Evergreen Investments. “Just like the techs in 2000, everyone piles in right at the crest of the wave. I would be very, very careful about putting money into energy at this point.”
Chad Cleaver, an energy analyst at Driehaus Capital Management, said there are other short-term energy opportunities besides the big oil conglomerates.
“I think that there’s several ways investors can play energy without worrying about getting in at the top,” Cleaver said. “There are exploration and production companies, which go out and explore for new oil and produce it. There are oil-service companies that build and service the rigs and pipelines, the infrastructure. And there’s alternative energy, which could be riskier, but has been getting a lot more publicity lately.”
Beyond the question of energy stocks, however, the spike in oil prices doesn’t bode well for the overall stock market.
“Oil stocks will likely outperform the stock market, but it’s going to come at the expense of the rest of the stock market not doing so well,” Abate said. “The higher oil costs are going to squeeze margins for businesses, and at this point, they can’t pass on their costs to consumers because they’re getting squeezed at the pump.”
Abate noted that the Fed, which meets Tuesday, could try to stem the rise of oil by raising short-term interest rates beyond the quarter percentage point widely expected on Wall Street. The current benchmark rate stands at 2.5 percent.
However, that would create different pressures on the economy and the stock market. While such a move would strengthen the dollar and likely help oil prices fall on international markets, the increase in the cost of capital could slow the U.S. economy as businesses find it harder to borrow money.
Many analysts believe the economy has a better chance of withstanding higher interest rates, which are generally expected to rise through the first half of the year anyway, than it does the unexpected speculation that has driven oil prices to record highs.
“There’s no great scenario,” Lynch said. “The fundamentals of the economy are good, they’re just no longer great … we think that the fundamental growth that’s there in the economy will keep things chugging along despite oil.”
That leaves one unanswered question: When will oil prices fall again? While most analysts expect a short-term pullback, Cleaver said international demand, particularly from fast-growing India and China, could mean that the current rise in oil prices point to a long-term trend.