Rising Oil Prices vs. S&P 500 (March Newsletter Excerpt)
The sketch comedy show Monty Python famously said, “Nobody expects the Spanish Inquisition.” People sometimes use the phrase to mock the notion that life can be predicted. At times, the world is chaotic, and things happen that nobody expected. One month ago, nearly no one thought 75 years of European peace would be broken. Even if someone had predicted it, even fewer would have predicted:
- It would not be a rapid Russian success, but demonstrate military weakness and incompetence.
- That Ukraine would mount a formidable opposition and the president would become an instant iconic folk hero rallying the world.
- With only a few exceptions, the world would be united on one side of the conflict. This is certainly true among nations, but also for the first time in 20 years, America is mostly unified on an issue.
- Sweden and Switzerland would abandon years of neutrality and send military and financial support to Ukraine.
- Germany would tact away from a “business only” foreign policy and plot a course for greater militarization and realize freedom must be defended.
- That the writing may be on the wall for the Putin regime and possibly this era of Russian history.
We are still very early in this conflict and there’s a temptation to get overly optimistic about the smallest of victories. We can only hope for peace and that the suffering and death will soon end.
Our hearts go out to all the suffering in the world. Not only the Ukrainians, but also conflicts that do not get as much attention such as:
- The Kivu conflict in Congo which is a civil war that’s been raging since 2004, claiming unknown thousands lives and displacing 1.4 million people
- The Yemeni Civil War which has been active since 2014, causing 377,000 deaths (including over 84,000 children from starvation)
- The persecution of Chinese Uyghur populations in Xinjiang where at least 120,000 (possibly as much as 1 million) have been put into mass detention camps
- The persecution and genocide of the Rohingya people of Myanmar which dates back to the 1970s which has led to tens of thousands of deaths and 700,000 displaced
Fighting for human sovereignty and personal freedom is always a worthy fight, and there are plenty of wars to be won.
What’s Logical May Not Be Actual
We always seek to educate the financial or economic angle of the headlines. As we’ve said in the past, we must always be mindful of the human suffering behind numbers.
In life, and especially in the capital markets, counterintuitive things happen. Leading up to Russian invasion, the stock market was steadily declining as this uncertainty weighed on investors. The market went down, even though most people thought Putin was bluffing. Strangely, as soon as Russia invaded Ukraine, the stock market rallied up and has continued to go up since then. This is hardly a logical reaction.
Russia produces about 10% of the world’s oil supply. As this supply is cut off, the obvious economic impact will be higher oil prices. The past two weeks, we have heard many pundits talk about how this will hurt the US and global capital markets. Indeed, that is a logical prediction.
However, when we look at the past 20 years, when the price of oil rose a lot, it was generally a very good time for the stock market:
The three significant eras when the price of oil was going up were:
Is fair to say that the stock market doesn’t seem terribly bothered by rising oil prices. The exception was during the 2008 Financial Crisis – oil was going up as the credit markets were falling apart.
Again, we are still very early in this conflict. This is probably going much worse that Vladimir Putin had expected. Part of this is that nobody ever expects the Spanish Inquisition. Sometimes, that which is logical is not always actual.