Analysis-Surging oil drives worries for US stock investors

Analysis-Surging oil drives worries for US stock investors

Impact of Rising Oil Prices on US Stock Market

By Lewis Krauskopf

NEW YORK, March 9 (Reuters) - A stunning surge in oil prices is rattling U.S. stock investors, as they brace for an even sharper rise in energy prices that could stagger the economy and further damage equities.

The 50% jump in U.S. crude to its highest level in more than three years is among the most significant financial consequences of the U.S.-Israeli war on Iran, as investors continue to calibrate economic and market fallout following the attacks launched just over a week ago.

"It's a shock," said Michael Reynolds, vice president of investment strategy at Glenmede. "It's out of left field, and people and investors are having to figure out what it means in real time as it's unfolding."

Higher oil and gas prices stand to drive up costs for energy-intensive companies, erode the discretionary spending budgets of consumers and lead to worries about inflation that could stop the Federal Reserve from lowering interest rates.

Stock and bond prices rose and oil dropped sharply late on Monday following President Donald Trump's remarks to CBS News that the war against Iran is "very complete." 

As they assessed a possible end to the conflict, investors said they were looking to see how Iran and Israel might respond and the extent to which energy shipments resume through the Strait of Hormuz, a critical chokepoint.

Market Correction or Worse?

Reynolds and other investors have been scrambling to game out scenarios should oil reach heights that were not on the horizon just days earlier. 

U.S. and Brent crude on Monday both broke above $100 a barrel, which investors have pointed to as a level that could create more stock turbulence. The commodities at one point on Monday neared $120, although they ended below $100, while U.S. crude was at $83 a barrel in post-settlement trade following Trump's comments. U.S. crude settled at $67.02 on February 27, the last session before the U.S.-Israeli strikes.

Meanwhile, stock volatility has spiked. The Cboe Volatility Index on Monday topped 30 for the first time in nearly a year, up from below 20 in late February.

While the declines for U.S. stocks have been moderate in comparison to other global regions, the benchmark S&P 500 was last down 2.6% from its late January all-time closing high. Major equity indexes ended higher on Monday after falling sharply earlier in the session.

Strategists at Yardeni Research said last Tuesday they expected a 10% stock market correction.

"Now we can't rule out a bear market and even a recession," the firm said in a note on Sunday. 

Oil and Stocks: More Tightly Linked

As oil prices have surged, the moves have become more tightly linked to the stock market.

The 20-day correlation between the S&P 500 and U.S. crude stood at -0.813 as of Monday morning, according to LSEG data, a strong inverse relationship that shows they have been tending to move in opposite directions.

Deutsche Bank strategists, watching whether the Iran situation could prompt a larger risk-off move, said in a note on Monday that the oil price shock ranks "among the more serious of history," but that investors are pricing in "a short rather than protracted conflict."

While stocks and oil are typically thought of as separate markets, stock investors have watched oil's trajectory quite closely at times historically, especially after extreme price moves.

In early 2022, a jump in oil over $120 a barrel following the start of the conflict in Ukraine coincided with declines in stock prices. In 2015-2016, stock investors worried that low oil prices, with U.S. crude dropping below $30 a barrel, represented a sign of broad economic weakness.

Pain at the Pump for Consumers

Focus is again on the economic ramifications of rising oil prices. 

Each 10% increase in the oil price stands to translate to roughly a 15 to 20 basis-point drag on GDP growth, according to JPMorgan economists. 

"Effects also could be non-linear, with larger oil price spikes producing an even larger hit to growth," the JPMorgan economists said in a note.

The JPMorgan economists and other analysts cautioned the economic fallout likely hinges on how long crude prices stay elevated. 

For now, the jump in crude is driving up prices at the gas pump. The national average for gasoline rose to $3.478 a gallon on Monday, up from $2.902 a month ago, according to data from the motorists' group AAA. That is the highest level since the summer of 2024, the group said.

"From an average consumer perspective, oil prices are about ... as visceral as it gets just because of filling up your gas tank," said Kevin Gordon, head of macro research and strategy at Charles Schwab.

Indeed, shares of companies most reliant on discretionary spending are among the potentially most vulnerable to higher oil prices. 

Airlines, for which fuel accounts for 20% to 25% of unit costs, according to Morningstar, have seen their shares hammered with the S&P 1500 passenger airlines index down about 11% since the conflict began.

One Headline Away from a Reversal?

As Monday's developments underscored, investors are wary that the situation could change at any moment. 

In a note on Monday, Raymond James Chief Investment Officer Larry Adam said the wealth management firm expects the conflict to be "relatively short-lived." The firm maintained a year-end price target for U.S. crude at $55-$60 a barrel.

Investors are also mindful of how Trump has changed course on market-sensitive policies during his term. In particular, there was his softening of his blanket "Liberation Day" tariff policies last April that caused a sharp rebound in initially battered asset prices.

"We're one ceasefire agreement headline away from all of this just reversing in a very aggres