Unstoppable Oil Could Be Nail in Coffin for Stocks

The comments below are an edited and abridged synopsis of an article by Kriti Gupta

Investors worried about inflation should pay attention to the rising oil price. It could be the last thing needed to derail the consumer spending spree behind surging growth in the US. From groceries to housing materials to gasoline, life is getting expensive for Americans, even those lucky enough to keep their jobs through the pandemic.

Unstoppable Oil Could Be Nail in Coffin for Stocks | BullionBuzz | Nick's Top Six
A jackup offshore oil drilling rig is docked at port for maintenance & repairs prior to reassignment.

In the last six months, the Bloomberg Agriculture Subindex has risen 20%, a margin not seen since 2010-2012. That was when the world’s supplies were roiled by a series of global weather events. Geopolitical analysts say it helped set off the Arab Spring.

Oil prices have returned to levels last seen in 2018 before the trade war with China began. In the first half of 2021, oil rose 45% after a gain of some 26% in the six months prior. It’s now around $75 a barrel and strategists are predicting it will hit $100. As much as it may help producers, it’s bad news for consumer-driven economies like the US.

That’s where it matters for stocks. Consumer spending is already moderating and the effects of the fiscal stimulus will likely roll off by the end of September. Rising prices, from groceries to gas, will likely result in less spending and traveling. And that means less revenue, and likely less in the way of earnings, for many segments of corporate America.

Concerns about that dynamic can already be seen. Consider the 66-day correlation between the S&P 500 and Brent crude. It’s traditionally positive because oil demand tends to come with strong economic growth, which also fuels the stock market. But it’s negative, something we haven’t seen since 2017.

When those two markets decoupled the last time, oversupply was the overarching concern for crude during a 3-year period that saw strong global growth. It was also President Trump’s first year in office, with his pro-growth and tax-cut agenda boosting the market. Inflation worries existed then, too, with the Fed picking up its tightening pace. But

‘transitory’ referred to price drops, not rises.

If that correlation remains negative, the best signal for the downside of stocks may be the upside in commodities.

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