It is the best of times, it is the worst of times for investors.
Only two months into the year, the broad S&P 500 index is up more than 6%, and oil is up twice that amount. And while the stock market’s rise these past two years has been accompanied by dreary economic news, we’re now starting to see truly encouraging developments in the economy.
The Labor Department reports that jobless claims plunged to a two-and-a-half year low, unexpectedly (they were actually forecast to rise somewhat), and after a long and bitter recession current economic forecasts call for respectable 3.5% to 4% growth this year. A strong auto sales report for February confirms the upbeat trend in consumer confidence.
Alas, just as we are on the cusp of good times, signs suggesting they will be short-lived abound. The commodities boom that has gratified the investing class poses a big challenge at the consumer level.
I know a manufacturer who distributes food products nationwide. Rising prices for the ingredients he requires have driven his costs up significantly.
His customers know him, trust him, like him — but that doesn’t mean they will accept the price increases. His choice is to eat the costs and keep his prices as they were, or to raise them and see the contract competitively re-bid.
If my friend’s experience is typical, and market prices and trends indicate it is, I foresee a profit squeeze ahead for commodity-dependent businesses, which is to say the whole economy.
The key may be the commodity with perhaps the widest impact: oil. The events in the Middle East and North Africa are a fresh reminder of just how interdependent the world is. The world’s most advanced economy, finally on the verge of growth, could fall back into deep recession based on events in the world’s most backward regions where illegitimate despots sit atop the filthy fuel we need to keep our world moving.
Indeed, the findings of James Hamilton, an economics professor at U. San Diego who studies oil shocks, are grim. His research (cited by economist Irwin Stelzer in the Weekly Standard) indicates that all but one of 11 postwar recessions was highly associated with the kind of oil shock that seems to be unfolding right now.
Does this mean sell, sell, sell?