Oil, Stocks Fall Today in Trading
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Last week, oil prices topped $80 a barrel, but that level is clearly unsustainable right now — as is this mornings initial rally on the stock market. The two are somewhat related, since oil and other energy stocks pulled ahead in early trading, helping encourage the broader market as it opened higher. By now, though, energy stocks have been overcome by financial stocks. Financials — which led a couple of stock market rallies last week — are pulling the stock market lower and overcoming the bulls.
Energy stocks, which were higher this morning, are finally in retreat as well, as it becomes clear that the global economy is not quite ready to accept $80 a barrel oil. Concerns that a rapid rise in oil prices could stymie the recovery are very real right now.
Oil and the economic recovery
One of the issues is that higher oil prices would divert too much discretionary spending away from common consumer spending subjects, as well as from the housing market, and slow economic recovery on a global scale. Speculation that global economic recovery would mean higher demand for oil has so far driven prices up close to $80 a barrel, but the reality is that demand is not increasing at a rate to justify those prices.
Another issue is the psychological one. Consumers are extremely sensitive to oil prices, which affect gasoline prices. When oil prices are rising rapidly, they become worried, and consumer sentiment declines — along with consumer spending. In the U.S., consumer spending accounts for about 2/3 of economic activity. Rapidly rising oil prices would like put a damper on consumer spending that is just starting to recover.
For today, it is clear that investors are not quite ready to concede that the economy is totally out of the woods. And it is clear that oil, as well as energy stocks, has a ways to go before gains are truly sustainable.
Disclaimer: I am not an investment professional. Nothing in this piece or on this Web site should be construed as investment advice. Before making investment decisions, do your own research and/or consult with an investment professional. All investment comes with the risk of loss. You are responsible for your own investment decisions and any loss that may result from your decisions.
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October 27th, 2009 at 10:44 am
[…] energy stocks couldn’t hold onto gains, and were overcome by financial companies and sinking oil prices. Today, the opposite is happening. […]