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High Gas Prices Threaten Stock Market Gains: Report

If history is any indication, the stock market could soon lose the resilience it has shown so far in the face of soaring oil and gasoline prices, says a new report from Morgan Stanley.

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According to the report, which was authored by chief U.S. equity strategist Adam Parker and several other analysts, “the U.S. equity market typically goes down when there’s oil supply shock,” albeit “it usually takes several months for the negative effects to be realized.”

Oil prices have surged 16 percent in the last three months, mainly on supply concerns stemming from the renewed tensions with Iran. Brent crudeclosed near $126 a barrel last Friday.

Morgan Stanley analysts recommend investors be cautious in this environment, particularly when it comes to the energy, materials and industrials sectors.

Energy stocks tend to underperform during supply-fueled oil price spikes, and supply shocks are particularly bad for Exxon Mobil , which comprises 29 percent of the S&P 500 energy sector.

“Our judgment is to be cautious of owning big overweights in these sectors,” says the report.

Morgan Stanley analysts expect the recent rise in oil prices to continue to impact prices at the pump, and that in turn will have a negative impact on stocks.

The national average price for a gallon of regular gas is $3.80, according to AAA, up 30 cents from a month ago. In some states, pump prices have already surpassed $4.

Gas price increases are likely a headwind for the U.S. equity market and these increases typically impact the market negatively more than price declines help the market positively,” says the report.

A $10 crude oil price increase would translate into 45-cent rise in gas prices, while a $10 decrease in crude lowers expected gas prices by only 3 cents.

Moreover, "a 10-cent gas price shock subtracts 1.2 percent from subsequent expected S&P 500 returns," according to the report.

“Perhaps the difficulty of isolating gasoline price shocks from overall price changes is responsible for the delayed equity market response; alternatively, investors may want to see evidence of a change in consumer behavior due to price shocks before altering their equity market views,” notes the report.

The industries most impacted by rising gas include automobiles, specialty retail, hotels and restaurants, household durables, and transportation.

“Given the stock market’s strong performance this year, we conclude either the market would be even better without higher gasoline at the pump or that the market behavior has been different so far this cycle than prior ones — our judgment is that caution is merited,” says the report.

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Disclaimer

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.