Implications of oil price spikes

Portfolio strategist, Vincent Delisle, asks the question: "When should investors start to be concerned about the current oil price spike?"

Modest increases in oil prices occurring in sync with an improving US consumer/employment outlook typically have minor impacts; in addition, oil price increases during the initial stages of recoveries appear less threatening. In contrast, swift moves in oil prices occurring later in the cylce tend to prove more challenging. Up to a 20% YOY increase in WTI, the forward impact on output, earnings and equity returns appears negligible; however, YOY price increases exceeding 20% take 1% off US GDP, dramatically slow the pace of earnings growth, and lower the equity risk/reward outlook. The negative impacts appear compounded in the latter stages of cycles. WTI is up 29% YOY and the US recovery started in Q2/09. Vincent believes sustained increases above current levels will jeopardize the 12-18 month outlook for earnings. Robust macro data remains supportive and equities may successfully shake off the current uncertainty. However, the ongoing oil spike, if sustained, has the potential to negatively impact the outlook for earnings growth. As the S&P500 celebrates the tw0-year anniversary of the rebound, investors should not forget what's been driving this epic recovery - profits. S&P500 earnings are up 115% since Q3/09 and any threat to earnings will take its toll.

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