Key insights
- The article discusses the impact of rising oil prices, exacerbated by geopolitical tensions, on the US equity market. Higher oil prices could lead to lower corporate profits, reduced consumer spending, and increased inflation, potentially disrupting the Federal Reserve's plans for interest rate cuts and increasing economic volatility. While not a guaranteed crash, the situation presents a bearish outlook for the market.
The S&P 500 index had been roughly flat year to date until oil prices started surging, and it's now sloping downward.
Prior to the war with Iran, the stagnant market was more about the macro-economy. The job market remains tight, inflation is still higher than the Federal Reserve wants it to be, and interest rates are still on the way down. On the plus side, the American consumer is proving to be resilient, and many retailers are demonstrating strength.
However, rising oil prices are dampening the market's mood. Is it time for investors to worry?
Higher oil prices affect the economy at large, as many companies use oil at some point in their operations. Higher costs lead to lower profits. And since electric vehicles have yet to fully catch on, higher prices at the pump mean less disposable income for other purchases. It's easy to see why the market doesn't like them, though investors who own oil company stocks like Chevron aren't complaining.
As the war goes on, the path toward lower oil prices becomes more prolonged, which means the potential disruption to the economy does, too. This is a cycle that has happened many times in the past, with strong repercussions, including recessions.
Another potential consequence of increasing oil prices is higher inflation, since higher costs across industries mean higher prices on goods. The Federal Reserve has been balancing bringing down interest rates with avoiding a recession, and this new development could upend the plan. Economic volatility could send the market down further.
There are a few things to keep in mind as an investor. One is that higher oil prices don't always lead to a bear market or a market crash. There are many moving parts that will affect how this plays out, including whether or not the war ends quickly.
More importantly, even if the market does crash, that's part and parcel of how the market works. There have been crashes before, as well as corrections and bear markets. The best chance of investing success is buying great stocks and sticking with them no matter what's happening in the market. Historically, the market has always bounced back and gone on to reach new highs, like it did last year. Over the past 30 years, which includes crashes and recessions, the S&P 500 has gained 1,700%, making it one of the safest wealth-generating machines on the planet.
To answer the original questions, investors shouldn't be worried as long as they've built a diversified portfolio of excellent stocks, including resilient anchor stocks and dividend stocks, and they can hold through market volatility.