Oil and Markets Update

Although North America is going through a warmer than usual winter leading to less oil and gas demand in the world's largest consumer, things are decidedly chilly in Eastern Europe. That, combined with supply uncertainty in Nigeria, Russia and Iran have conspired to begin to drive energy prices northward again. In fact, the market may finally be waking up to the long-term unsustainability of the oil supply and demand curves.

In several posts over the last couple of days the always must-read Barry Ritholtz looks at the implications of sustained high oil prices on the broader market indexes.

Hot or Not?

So to proclaim that Oil has absolutely no impact on stocks is both factually incorrect, and potentially dangerous. There is a tipping point for Oil and the Economy -- we have yet to cross that level -- but once we do, you can be sure that Oil will impact equity prices.

Where is the tipping point? I tihnk markets are "used to" $50 oil, uncomfortable at $60, and unpleasant over $65, and downright ornery over $70. You can see this reflected in last week's performance data.

Oil and the Markets

While the Dow industrials are down 0.5% for 2006, after a decline of 0.6% last year, the S&P 500 and the Nasdaq Composite Index both were up last year and still are showing gains this year. But Mr. Tower does worry that a bear market could begin some time this year, as investors become disenchanted with corporate performance and some are enticed away by higher interest rates in money-market funds and bonds.

If investors adjust this week to the Iran worries, some of that selling pressure could ease. But a more fundamental reason that investors are nervous is that they fear that some of the market's underpinnings have weakened, making it harder for stocks to hold up in the face of the oil and profit worries.