Stocks Rise in Spite of Increasing Price of Oil

By Adam Shell

NEW YORK — Pumped-up oil prices were supposed to siphon the life out of the stock market. But not even oil gushing near a record $72 a barrel has been able to slow down the gains posted by the Dow Jones industrial average, which is speeding along at six-year highs.

Over a year ago, Wall Street pundits started regularly warning about the dire consequences that $50 oil would have on the economy and stocks. Then $60 became the magic number to worry about. The angst crested in September after Hurricane Katrina temporarily pushed oil above $70 a barrel.

But rather than buckle under the weight of increasingly costly energy prices, stocks have exhibited a surprising resilience. The stock market has continued to move higher and, at least for now, broken the trading pattern it has followed in relation to oil. For much of last year, stock and oil prices shared an inverse relationship. When oil prices went down, stocks went up. When oil spiked up, stocks slumped.

Today, stocks are rising in tandem with oil prices. The shift is important because it reflects a key change in the way stock investors view the risk of higher oil prices.

Once, investors were convinced skyrocketing oil would result in an economic slowdown or higher inflation, or both. But they have seen no evidence of that despite the fact that oil prices have climbed 18% this year and nearly 40% in the past 12 months from about $50 to $70 a barrel.

"A lot of people have come to the conclusion that high energy prices haven’t really slowed growth or caused inflation to spike," says John Derrick, research chief at U.S. Global Investors.

As a result, investors are less worried about the damage caused by elevated energy prices, and that has resulted in more aggressive investing. For the market to get spooked, "Oil has got to show us some signs that it has had the bad consequences" investors originally envisioned, says Ed Yardeni, chief strategist at Oak Associates.

The market’s once-intense preoccupation with oil has also been replaced by its new fixation with interest rates, inflation and the Federal Reserve.

Minutes released by the Fed earlier this week noted that its nearly 2-year-old interest rate-tightening campaign is nearing an end. That sparked a rally because it signaled to investors that inflation was under control and the economy remained strong.

Other reasons oil is no longer depressing stocks:

*Corporate earnings have remained robust, notes Jason Trennert, investment strategist at ISI Group. Despite the drag of high energy prices, 70% of the 144 companies in the Standard & Poor’s 500 that have reported first-quarter results have topped analysts’ expectations, Thomson Financial says.

First-quarter profit growth expectations have risen to 12.4%, up a full percentage point from last week.

*The fear premium may already be factored into oil prices. Worries about supply disruptions because of Iran’s nuclear ambitions, war in Iraq and political unrest in Nigeria are already reflected in the current price of oil, Derrick says. A super-increase in oil is unlikely unless there is a really dramatic event, he adds.

*Investors have adjusted to $70 oil. "The market gets used to certain prices," says Quincy Krosby, chief investment strategist at The Hartford, a financial services firm. "But if we get to $80 oil, that is new to the market and something that attracts attention."

(c) Copyright 2005 USA TODAY, a division of Gannett Co. Inc.