S&P 500 Unfazed by Oil Price Shocks

by: Gary Dorsch

Financial commentators always look for reasons to explain why the stock market declined on any given day, and quite often, the high price of crude oil is the scapegoat. However, as seen in the chart below, the S&P 500 and for that matter, most of the global stock averages have become immune to sharply higher oil prices. In the case of the US, soaring home prices have offset the taxation of rising energy prices on household incomes. How will the new Fed chief Ben Bernanke react to a spike in oil prices if Iran unleashes the "Oil weapon" in 2006?

"If inflation has recently been on the low side of the desirable range, and the available evidence suggests that inflation expectations are likewise low and firmly anchored, then less urgency is required in responding to the inflation threat posed by higher oil prices. In this case, monetary policy need not tighten and could conceivably ease in the wake of an oil-price shock," Bernanke said on October 21, 2004. Fed chief Greenspan added that although the US is now seeing record nominal prices for crude oil, "we are well below where we were in the 1970's in real terms. Over the long run, say a series of years, the elasticity of oil demand with respect to price is fairly high." If correct, crude oil prices would have to rise above $90 per barrel, in order to shock the S&P 500 index.

S&P 500 Three Year Chart

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