Oil crisis unlikely to lead to bear market, says CFRA’s Sam Stovall
Though oil prices have spiked in the aftermath during the Iran war, disruption in energy markets probably won’t lead to a major downturn in U.S. stocks, according to Sam Stovall at CFRA Research. The war – now in its third week – has brought about the biggest oil supply disruption in history by closing the Strait of Hormuz, sending oil prices above $100 per barrel. Stocks have sold off amid growing concerns that inflation will rise and economic growth will slow, leading to stagflation . For all that, however, the S & P 500 is still less than 5% below its all-time high reached in late January, when it touched 7,002. If the index were to hit the 5% threshold this week, that would be more than 47 days since it notched the high, which is not on par with historical trends. The S & P 500 has needed, on average, only 28 days to pull back 5% to 9.9%, according to Stovall, the chief investment strategist at CFRA. It has needed an average of 80 days to move into a correction, falling between 10% and 19.9% below a recent high, and an average of 245 days to move into a bear market, falling 20% or more. “Even though history should be viewed as a guide and never as gospel, the S & P 500 has never fallen into a bear market since WWII when it took more than 40 days to slip into a Pullback, possibly giving investors ample time to evaluate the likelihood that the current crisis would require such a selloff,” Stovall wrote to clients Monday. So, while investors shouldn’t rule out the index possibly suffering a greater decline, the amount of time the index has taken to even approach a pullback now signals that while a correction is “highly likely,” a bear market is not, Stovall said. Still, CFRA’s Energy Strategy Group projects that crude oil prices will continue to climb and remain above the $100 level. On Monday, U.S. West Texas Intermediate crude futures were lower by more than 3% to trade around $95, while Brent crude futures fell 1%, close to $102. Although the risk of faster inflation posed by a rise in oil prices could dim the outlook for interest rate cuts by the Federal Reserve this year, Wall Street is pretty sanguine that higher energy won’t severely damage stocks. “Investors have become more comfortable operating in uncertainty rather than waiting for it to clear,” Morgan Stanley’s trading desk said in a note, adding that the fundamental backdrop of the market suggests strength. The desk cited positive earnings momentum, continued AI infrastructure investment and government policy that is still “broadly supportive.” “For now, the market seems content doing what it often does best – digesting a complicated environment piece by piece,” the Morgan Stanley traders wrote. “And if the last few weeks have taught us anything, it’s that patience and perspective remain some of most valuable assets investors can carry into whatever comes next. Stay nimble!”
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