What's fueling the bull market? It's crude, sweet crude

In the words of Monte Gordon, ``This is a relentless bull.'' The elixir fueling the bovine charge? It's sweet crude. Oil prices have dropped nearly 50 percent in the last three months -- and most of the decline came last month. (If the Dow Jones industrial average took a hit like that, it would be trading at about 850.)

The slide in oil prices is creating an economic ``environment that's much more friendly'' for financial assets than it's been in a long time, says Mr. Gordon, director of research at Dreyfus Corporation, the mutual fund giant.

As a barrel of oil gets cheaper, the cost of doing business declines. Factories spend less on fuel and on transporting goods to market. So there are fewer reasons for consumers to get socked with price increases. And that means less pressure on companies to raise wages.

Lower energy costs, coupled with steady product prices and wages, often produce a rise in corporate earnings. Thus, stocks become more valuable. In short, this low-inflation scenario is bullish for the market.

Support for this ongoing inflation trend was borne out by Labor Department figures released last week. Wholesale prices fell 0.7 percent in January, owing to lower energy costs. That's the steepest decline in three years.

Speaking to New York Mercantile Exchange traders last week, Allen Sinai, chief economist at Shearson Lehman Brothers, described the oil price plunge as ``a lucky break -- in the Reagan tradition.''

Mr. Sinai forecasts that oil prices in the $15-to-$18 range will produce these incremental economic benefits:

Real gross national product to rise an extra 0.8 percent, putting the annual growth rate at 3.7 percent, he says. (Most economists are pushing up their estimates into the 3.5 to 4.5 percent range.)

An $8 billion to $10 billion deflating of the federal deficit in the first year, with a $25 billion to $35 billion reduction the second. A stronger economy brings in more taxes, and the cut in interest rates brings down the cost of financing the federal debt.

Interest rates on long- and short-term bonds to fall by as much as half a percent this year.

Inflation to slip as much as 3 percent on the wholesale level.

After-tax corporate profits to rise 2 to 3 percent more than expected.

Sure, that's the general prognosis, agrees Edward Nicoski, a market strategist at Piper, Jaffray & Hopwood in Minneapolis. But he's not thoroughly convinced that it will result in higher stock prices -- at least not soon:

``There's a ton of uncertainty out there still. Which way are energy prices going? What's going to happen to the banks [with loans to oil-producing countries]? Interest rates? The economy? So far, the uncertainity has translated into positive action in the markets.''

Not all the economic signals are positive. Mr. Nicoski points out that consumers didn't exactly jam department store aisles in January. Retail sales trailed expectations. Still, he's preparing clients for a stronger economy. ``We are starting to recommend cyclicals for the first time in about four or five years.'' Cyclicals tend to be basic industry companies where sales rise first when the economy improves. The Piper buy list (for a minimum six- to nine-month holding) has cyclicals like aluminums, chemicals, and semiconductors, along with blue-chip technology stocks.

Standard & Poor's Outlook newsletter editor, Arnold Kaufman, isn't ready to leap into cyclicals. He takes a seat in the slow-start, fast-finish economic class of '86. ``December numbers may have been an aberration,'' Mr. Kaufman says. ``January may be good, but subsequently I think growth will slow. That will give us a good background for lower interest rates.'' He thinks the oil price declines won't substantially affect industry till later this year.

``We don't feel it's time yet to be moving out of interest-rate-sensitive issues and putting dollars into cyclicals in a large way. When we see more signs of economic improvement, then we'll move.''

Apparently investors saw enough economic improvement last week to bid up shares handsomely. Most of the averages hit new highs. The Dow Jones industrial average closed Friday at 1,664.45, up 51.03 points in five sessions.

About these ads
Sponsored Content by LockerDome

We want to hear, did we miss an angle we should have covered? Should we come back to this topic? Or just give us a rating for this story. We want to hear from you.




Save for later


Saved ( of items)

This item has been saved to read later from any device.
Access saved items through your user name at the top of the page.

View Saved Items


Failed to save

You reached the limit of 20 saved items.
Please visit following link to manage you saved items.

View Saved Items


Failed to save

You have already saved this item.

View Saved Items