- The Washington Times - Monday, June 9, 2008

Q: When I watch CNBC, they are showing oil prices constantly on the screen along with phrases like “America’s Oil Crisis” next to the stock market indexes. With the stock market declining again and skyrocketing oil prices, I feel worried and uncomfortable holding on to my stocks. What should I do?

A: Stop watching so much television.

Often, by the time some news event is receiving such extraordinary attention that you see screaming headlines daily, it’s likely something will soon change. Prior to the late 1990s, few news outlets reported on the technology-laden Nasdaq index, but when technology stocks started zooming, the Nasdaq index was reported all over the place. This led many novice investors to pile into tech stocks in the very late 1990s and early 2000s just before those stocks dropped sharply in value.

“We believe that many market participants overemphasize the degree to which higher oil prices will affect both consumer spending and the stock market. First, the proportion of personal spending dedicated to energy is quite modest, even given recently much higher oil and gas prices, and is largely offset by rising disposable income and falling prices in other much bigger categories such as housing and autos,” said Andrew Teufel, director of research at Fisher Investments.

Mr. Teufel adds that there has been little, if any, correlation between crude oil prices and broad stock market indexes. “For instance, the stock market rose about 12 percent from its low point in March through mid-May, while oil rose concurrently from $100 to about $125.

Interestingly, an analysis by the CXO Advisory Group found that “an oil price shock can be good, bad or indifferent for the overall U.S. stock market according to the cause of the shock. A shock driven by global economic expansion is a good sign for stocks.” If you think about it, this last point makes sense - and consider what’s happened in recent years, especially with the booming economies in China, India and other developing countries.

Of course, most Americans detest paying these high prices at the pump. But, as I expected, high prices motivate consumers and businesses to scale back on usage, which will lead to downward pressure on prices.

People are buying smaller cars and more fuel-efficient cars. Businesses are finding ways to reduce usage. Even once oil prices begin to fall, these changes will remain in place. Thus, much of the reduced consumption should remain locked in place, so I’m quite optimistic that these very high prices may not be sustainable.

*Write Eric Tyson via e-mail: eric@erictyson.com.

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