RRising oil prices have given consumers more to worry about than just high gasoline prices. What does soaring oil prices mean for your investment portfolio?
Brent crude oil – the international benchmark for oil prices – and US West Texas Intermediate crude oil futures both hit their highest prices since 2008 on Sunday. The price spike comes as the United States and its allies in Europe consider banning oil imports from Russia, raising concerns over market supply.
Rising energy prices spooked stocks on Monday, with the S&P 500 tumbling nearly 3% as investors worried about what the war in Ukraine could mean for the global economy and inflation.
Investors have experienced volatile financial markets in recent weeks amid the Russia-Ukraine crisis. Between what Russia sanctions could mean for inflation and the Federal Reserve’s reaction to the news, investors have a lot to keep in mind when it comes to what, if anything, to do to protect their wallets.
While rising oil prices are far from the only factor hurting stocks in 2022, here’s what experts say you need to know about the impact the high cost of oil could have on your investment portfolio. investment.
What do high oil prices mean for the stock market?
Rising oil prices can be worrying for markets because it means higher costs for everything from heating and lighting homes to transporting goods.
Now rising oil prices are raising fears of a global recession, said Michael Hewson, chief market analyst at CMC Markets. The Wall Street Journal. “It’s hard to see much in the way of a meaningful stock market rally now amid continued escalation” in Ukraine, he added.
In a recent note to clients, Bespoke Investment Group wrote that there have been recessions following three of the notable commodity price increases in the history of the Bloomberg Commodity Spot Index: recessions beginning in 1973 , 1979 and 2007.
However, it is difficult to know the impact that rising oil prices will have on an investment portfolio because it is difficult to predict the actions that central banks will take, says Melissa Brown, global head of applied research at Qontigo. .
If oil prices continue to rise, central banks could raise interest rates to fight inflation. Then again, much higher oil prices could have a negative impact on the economy, and that could possibly mean that central banks won’t want to raise rates as much, Brown says.
Kathy Bostjancic, chief U.S. economist at Oxford Economics, told Money in late February that her firm no longer expects the Fed to raise rates by 175 basis points for the year, which was their previous estimate.
Raising interest rates is a tool the Fed uses to fight inflation. Higher interest rates make it harder for businesses and consumers to borrow, and this limited spending is meant to help keep the prices of goods like food and cars under control. But rising interest rates also tend to crush the prices of financial assets like stocks, which means it can become much more difficult to make money buying and selling stocks.
Another complication is that rising oil prices can also self-correct due to what is known as demand destruction, i.e. when demand falls for a certain commodity, such as oil.
Basically: The higher gas prices go, the less people want to drive, says Sam Stovall, chief investment strategist at CFRA Research. A drop in gas demand would tend to lower prices. But because so many other aspects of our lives are based on fossil fuels, from heating and lighting our homes to transporting the goods and services we buy, Stovall adds, demand is likely to remain high.
While a spike in oil prices has been followed by a recession in the past – and the last time gas prices were this high was during the financial crisis and stock market crash of 2008 – some experts say the United States is unlikely to see the same today, in part because consumers have a lot of money saved and the job market is strong.
What investors should do now
If you have a well-diversified portfolio, your best decision is probably to just sit back, Brown says.
“Things are very changeable, so any changes you make to your portfolio could go in the wrong direction,” she adds.
There are investment strategies you might consider, but it’s wise to exercise caution. If you’re looking to take advantage of the situation by buying energy stocks, it’s important to keep in mind that Stovall says they’re starting to get a bit pricey.
While CFRA maintains an overweight recommendation on the energy sector, the company is becoming more selective about the stocks it actually recommends. (An overweight recommendation indicates that analysts expect the stock or sector to outperform the market in the coming months.) The stocks that CFRA ranked first based on growth at reasonable prices are Ovintiv Inc. ., an oil and gas producer, and Targa Resources Corp., an energy infrastructure company.
Overall, it’s best not to try to time the market. Instead, experts recommend taking this time to ensure your risk tolerance is still in line with your portfolio.
If the current market swings are causing you to lose sleep – perhaps because you have short-term cash needs – then you really need to make sure you’re well positioned to meet those needs, David Sekera, Chief Strategist of the US market at Morningstar, Money previously said.
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