High Oil Prices: Train Wreck for Our Economy

Predicting short-term moves of the market is big business for folks who sell that sort of information. Some are better than others are, but none are right all of the time.

I don’t want to join their ranks, but oil at $65 a barrel makes me nervous. In fact, high oil prices are a train wreck waiting to happen for our economy.

The stock market is an incredibly dynamic collection of variables – some you can plot and calculate, while others fall into an area driven by emotion.

Different Look

When you combine high oil prices and the Fed’s action Tuesday, you could get two different looks at the future.

Tuesday, Alan Greenspan and Federal Reserve Open Market Committee raised the target interest rate for overnight funds to 3.50%. This is the 10th consecutive increase and was totally expected by the market.

Market watchers were more interested in the accompanying statement from the committee, which often signals plans for Fed action.

Since the market moves on the future, anticipating what the Fed will do about interest rates at its next meeting weighs heavily in future market predictions. The “I” word that most of the Fed watchers look for is not “interest” rates, but “inflation.”

Inflation

Inflation is a frightening word to the market for many reasons, including:

• It devalues stock
• It forces interest rates up
• It raises consumer prices
• It frightens consumers

The word from the Fed meeting was even more upbeat on inflation than in the past, noting that underlying “core inflation” numbers, which exclude energy and food, remain relatively low. In other words, no inflation in sight.

At a time when oil is hitting record prices, it’s hard to feel comfortable with this observation and some of the more bearish market watchers agree. Oil at $65 a barrel is a disaster and if it continues for any length of time, will certainly have a bad influence on the economy.

Conclusion

If you think your portfolio needs protection, you may want to consider shifting some assets out of stocks and into bonds. Consult with a financial professional before making any investment decisions to see what works best for your situation.