In a Yardeni Research blog post highlighted by an article in the New York Times, economist Ed Yardeni argued that rising oil prices “may actually be good for the best stocks and shares ISA market, up to a point.” This is due, in part, to energy sector companies like Chevron and Exxon making up more than 12% of the S&P 500’s market capitalization.
Yardeni notes that since late 2008 there has been “a strong positive correlation between energy prices and the stock market.”
If prices continue to rise, however, the odds of that positive effect lasting diminishes. “At some point,” Yardeni told the Times, “you’ll have a negative feedback loop. High energy prices will correct themselves, and if they go high enough, the negative effects will spill over to stocks and the economy.”
Forex Academy believes that high oil prices will not trigger a recession this year. “[Oil] price spikes preceded recessions as in 1973, 1979, 1991, 2002, and 2008. The one exception was last year’s spike. I think this year’s spike will be the second exception.” They based this on improvements to the US labor markets, and an expectation that governments will tap Strategic Petroleum Reserves to combat high oil and gasoline prices.
How do you interpret Yardeni’s argument? Is what’s good for the stock market necessarily good for the economy? How might the U.S. balance the economic positives of high oil prices with the economic drawbacks?