Suddenly, investors are waking up to the reality that high-priced oil is here to stay.
Since the Bear Stearns bailout in March, oil and stock prices have largely risen in tandem, while the economy has shown signs of shaking off the credit crunch and housing slump.
But in recent days, the game has abruptly changed. Skyrocketing oil prices have sent stocks reeling, and the economy has begun to show troubling signs from the stress of burgeoning inflation.
The Federal Reserve stepped in Wednesday afternoon to make things even worse. The central bank,according to minutes released from its most recent meeting, cut the economic outlook for 2008 while warning of inflation and unemployment troubles ahead, yet indicated its aggressive rate-cutting had reached an end. The major indexes sold off profusely in post-Fed trading.
That has Wall Street pros worried that both the market and the economy could be in for some difficult days ahead, thanks to oil's meteoric rise past $130 and its seemingly unstoppable march to points well beyond.
"People have finally figured out that this is not just some speculative rise, that it's a real fundamental change in supply and demand," says Chris Orndorff, head of equity at Payden & Rygel in Los Angeles. "These higher prices are here to stay. The days of $40 a barrel oil are gone."
Analysts are noting the trend, as well as its impact on investor behavior.
"The marketplace is not looking at oil as much as a short-term energy trade anymore," adds Byron King, an energy analyst who writes for several trade newsletters, including Outstanding Investments. "There is a medium- and long-term sentiment for scarcity and fear that is kicking into the market right now. Higher energy prices are here forever, and are even starting to get baked into the cake."
Oil's rise Wednesday hammered airline stocksand took their toll on other industries that rely on energy to either manufacture or deliver their products. United Airlines stock tumbled, while carrier FedEx moved lower and its delivery competitors in the rail industry, led by CSX and Union Pacific , saw shares move up nicely. Billionaire investor Warren Buffett has been active in the railroad industry since 2007.
As a sense of clarity has emerged regarding the apparent lack of a bubble in the oil market, there has come the realization that the effects could be profound.
"I think it's going to keep a lid on the stock market for a long time," says Peter Miralles, president of Atlanta Wealth Consultants. "Could we see a 10,000 Dow? Yeah, we could."
Miralles sees the ground carriers like FedEx and UPS suffering from the prolonged increase in oil. Recreation vehicle makers like Winnebago also will face pressure. Conversely, motorcycle leader Harley-Davidson could benefit, because even though it's generally considered part of the leisure industry, consumers could turn to Harleys due to their gas efficiency, he says.
Other industries, like food and beverage and pharmaceuticals, which rely on trucking to move their products, also will face pressure, Miralles says.
In fact, the real energy impact story could be more on how it affects businesses than consumers.
"It takes energy to get the materials in, it takes energy to turn the materials into goods, and it takes energy to get them out to the market," Ken Goldstein, The Conference Board senior economist, said on CNBC. "I think you're seeing the impact more on the business side than on the consumer side, and the more that we see these prices going up the more you're going to see that."
"We haven't been here before," Goldstein continued. "There's no road map here, so it's hard to figure out exactly what the tipping point represents."
Opportunity For Some
As in any other market trend, though, some will make money.
Energy exploration firms such as StatOil Hydro stand to gain. So could traders not afraid to get into the volatile commodities futures market.
"I think we're beyond the part about the froth on the beer and we might be getting into a short-term bubble," King says. "But it would be very dangerous to play this bubble unless you're a very seasoned trader."
In the broader market, innovating companies that can capitalize on the rise in energy costs also could profit.
Orndorff says technology companies "that find ways to reduce the need for a high-energy input product" stand to benefit--from videoconferencing to entertainment that allows consumers to relax closer to home. Polycom is one publicly traded firm that offers teleconferencing; video delivery companies such as NetFlix might benefit as people choose to rent movies instead of paying exorbitant movie theater prices.
Such economic concerns will play a huge part in stock market behavior as people have less money to spend in their daily lives due to soaring gasoline prices. Economists say that the run-up in gasoline costs will eat away most of the rebate checks taxpayers recently have received under the government's economic stimulus program.
"Consumers are going to change their behavior because of the price of gasoline," says analyst and venture capitalist Peter Cohan. "Maybe this isn't going to be a quick, short, shallow slowdown. Maybe it will take longer to work itself out."