Fisher Investments Editorial Staff
Geopolitics, Market Risks

Oil’s Ominous Overhang?

By, 02/24/2011

Story Highlights:

  • Rising oil prices have some fearing repeats of the 2008 financial crisis or 2010's correction.
  • History can provide useful context for elucidating current conditions, but only if the events compared are fairly similar.
  • Mideast unrest and rising oil prices could certainly cause another correction, but it's important to take more than feelings about past corrections into consideration when making forward-looking portfolio decisions.

With higher oil prices weighing on investors' minds, there's talk we could see a repeat of last spring's correction or even of 2008's financial panic. We're big history fans and think it can be one useful tool (though never the sole one) in crafting forward-looking expectations. But to reach a more valuable conclusion, past events under consideration should be at least fairly similar. 

Let's take a brief look at 2008 and 2010 and see whether the comparisons are apt. Yes, oil prices were high in 2008—and then we had a bear market. Cause and effect? Not really. 2008's bear market had very little to do with oil and a lot to do with an ill-considered accounting rule change arguably causing, then exacerbating a credit crunch and subsequent schizophrenic government responses. (Lehman Brothers didn't fail because of oil supply disruptions.) So oil's high price was more coincident to than causal of the 2008 financial panic.  

What about 2010? Last year's correction was driven by fears of PIIGS economies defaulting and leading to the sudden and disorderly implosion of the euro, which then morphed into economic double-dip fears. Again, nothing to do with oil. In fact, oil prices fell moderately through most of the late April-July correction. 

Now, could the current unrest in the Middle East and spiking oil prices cause another correction? Of course. Market corrections or pull-backs are in fact usually driven by seemingly (or actually) big stories (the Russian Ruble crisis, Y2K, bird flu—twice!) that later turn out to be not as heinous as feared. But to say now "just feels like" last May-June isn't a great way to approach a forward-looking portfolio strategy if you can't draw many fundamental parallels—especially if the dissimilarities are far greater. (After all, many folks said at the time 2010's correction "felt like" 2008—but stocks ended 2010 solidly in the black.) Further, oil being high doesn't automatically mean economic malaise or a market downturn. Can the two coincide? Absolutely. But so can any two factors—it doesn't necessarily mean they're always causal.  

Further complicating the picture, something may be impactful to stocks in one instance and less so in another—happens all the time in capital markets. If, as we indicated yesterday, all of Libya's oil went offline immediately, that could cause a near-term price spike—maybe a big one—and contribute to some supply imbalances, though it likely wouldn't imperil overall global supply. And a bigger supply disruption could have even bigger consequences—but that's always a possibility, and it's not clear to us that broad-scale supply disruptions are very likely at this point. Middle East economies have strong incentives to keep production online. (First, it's important to their ongoing economic health. Second, it can provide money to buy off a potentially unhappy citizenry and remain in power.) 

Will Mideast unrest and ensuing volatility continue? Possibly. But it's a frustrating and fruitless exercise to make near-term forecasts on market volatility. Want a better guidepost to 2011? Forget 2008, when Financials woes weighed heavily on markets overall—vastly different from what we see today. Instead, look to 1960, 1977, 1994, and even 2005—all third years of ongoing bull markets. In our view, it wouldn't be surprising to see the market move choppily sideways this year regardless of continuing developments in the Middle East—not atypical of a third year.

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.


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