Oil's rapid rise threatens to ignite a selling storm in the stock market unless crude prices cool down.
In the week ahead, the stock market will stay on edge as equity investors watch the bubbling oil market, hoping for signs of a peak and pull back. Oil is the week's big economic indicator, but investors will also be watching new data on the consumer, housing and a few Fed speeches.
Oil has been on a hair-raising run, cracking a shocking $135 per barrel on the Nymex and finishing this past week with a 4.7 percent gain. Crude closed Friday at $132.19. Gasoline in the futures market soared 5.4 percent to $3.3960 per gallon.
The big question is how high can oil prices go? Goldman Sachs says the average for the second half of the year will be more than $140 a barrel. Boone Pickens this past week said he expects it to hit $150 this year.
M.F. Global's John Kilduff, a CNBC contributor, says he thinks the oil market may have formed a top this past week. "With the week over, the weekly bar chart for crude is looking like a pronounced blow-off top," said Kilduff.
Stocks at the same time had one of their worst weeks since February 8 (a peak period for credit and recession fears). The Dow lost 507 points, or 3.9 percent. The S&P 500 gave up 49 points, losing 3.5 percent to 1375, and the Nasdaq wiped away 84 points or 3.3 percent to 2444.
"I think if oil stays at $130, equities are in big trouble...because there's so much pressure here on corporate America because of this oil price," said Thomas Lee, chief market strategist at J.P. Morgan.
"I think if we stay at the $130s for another week, companies are going to start pre-announcing and that's when analysts start changing estimates," said Lee.
Lee said he is not yet changing his view on stocks because this price may be temporary, and oil has only been in the $130s for a few days. "It's not a true shock until it's the permanent price," he said. He believes oil even at $120 would be more manageable. "I think we averaged $107 in the first quarter, so that's a smaller creep," he said.
"I'm really giving everyone a heads up that this is really making me nervous," he said. Lee said oil at $133 per barrel, if it endures, could take $3 off the projected $93 earnings for 2008 for the S&P 500. Oil companies also gain profits in that equation, and without them included, it's a $7 to $9 hit to company earnings.
Bank of America Chief Market Strategist Joseph Quinlan says Wall Street analysts may not have factored in high oil prices, but the stock market is beginning to. "I think the market is ahead of the analysts. I think that's what the markets were doing in the last couple of days, discounting these energy costs," he said. The rising costs are squeezing margins, he said.
"That's why I think we (stocks) can press lower, as the analysts mark down earnings estimates. That will weigh on earnings as well," said Quinlan.
Yet, for the year, he still expects stocks to be up about 5 percent. "At best, we're going to muddle through with the markets. There's too many cross currents and uncertainties related to oil and food prices. The fed minutes were pretty hawkish. The consumer is in a funk. The best case scenario is muddling through," he said.
Quinlan said the market could ultimately retest its lows and for the near term, stocks could head lower until there is some clarity. He said another concern is that the emerging markets would slow down, hurting the overseas earnings of U.S. companies. "The global earnings of U.S. companies rose 20 percent last year. You're looking at half that this year," he said.
"There would be less disposable income to buy cokes, computers and maybe even cars as the world adjusts to this kind of food and energy shock of 2008," he said. Quinlan likes energy stocks, large cap technology, and industrials, and his favorite commodity is water.
Consumers on a Diet
This Memorial Day weekend, the start of the summer driving season, will be a big test for the American consumer to see just how much willingness there is to spend on travel and entertainment
Evidence is mounting the consumer is going on a gasoline diet as prices rise close to $4 per gallon at the pump. Drivers clocked 4.3 percent fewer miles in March, according to the Department of Energy.
A big hope is that falling demand will stop the oil and gasoline price spiral.
"That's the key, we need a break in oil prices to get the consumer spending," said Quinlan. He said he will be watching the consumer confidence number on Tuesday. "Consumer confidence is at a 28-year low. How low can it go?"
"Consumers are shifting their habits. They're going to drive less...If the consumer really retrenches, then we've got the dark side of the recession talk and that's an issue. The markets have been pricing in (the idea that) maybe there won't be a recession. If you get a really dark consumer confidence number, that could raise the odds of recession and put the Fed back in play in terms of lower interest rates," Quinlan said.
Charles Schwab Chief Investment Strategist Liz Ann Sonders said that the consumer is pinched more than ever. She said 55 percent of disposable income, a record amount, is now going to necessities—debt payment (including mortgages), health care, food and energy. "The U.S. consumer is still 18 percent of world GDP. That's a big number," she said.
CEO Fear Factor
Both Quinlan and Sonders said the consumer's anxiety is now reaching the C-suite. Sonders said she is focused on this week's consumer data and considering it in conjunction with business confidence, which is falling. "They're kind of keying off the consumer," she said.
"It's not just the consumer that's in this depressed mode, but the CEOs are joining them, and that's the calculus this year," said Quinlan. A recent Conference Board survey showed CEO confidence at an eight-year low.
Even though the focus has shifted to boiling oil, signs that the credit crunch are still plaguing the markets surfaced in financial stocks in the past week. Particularly for Lehman , there are worries of more writedowns when the brokerage industry reports profits early next month. This coming week is the final week of the quarter for the firms. Financial stocks lost 6.1 percent for the week. A sign of fearful times, those utilities were the best performers, losing just 0.08 percent for the week. Consumer stocks were second worst, losing 5.3 percent and materials lost 4.9 percent. Energy lost 2.4 percent.
Gold ended the week 3 percent higher at $925.60 per troy ounce. The dollar lost 0.7 percent against the yen for the week and 1.2 percent against the euro. The 10-year Treasury added 5/323, dropping its yield to 3.833 percent and the two-year was at 2.424 percent.
On Tuesday, the S&P Case-Shiller data home price data is reported at 9 a.m. and new home sales are at 10 a.m. that day. Consumer confidence is reported at 10 a.m. Tuesday, and consumer sentiment is released at 10 a.m. Friday.
Durable goods data is reported Wednesday at 8:30 a.m. A second look at first quarter GDP and weekly jobless claims are both reported at 8:30 a.m. Thursday. Chicago PMI and personal income are reported Friday.
Fed Chairman Bernanke speaks Thursday at 2:30 p.m. New York time in Basel, Switzerland, on risk transfer mechanisms and financial stability. Bernanke is not expected to make news in his speech and will not take questions. He speaks at a workshop, hosted by the Research task force of the Basel Committee on Banking Supervision.
Fed Vice Chairman Donald Kohn speaks Thursday at 7 p.m. on money markets and financial stability at a New York Fed event. On Tuesday, Fed Governor Randall Kroszner speaks at 7:15 New York time in Sao Paolo, Brazil, on the prospects for recovery and repair of mortgage markets. These are the same remarks he gave on May 22, according to the Fed.
There's a light calendar of earnings news in the week ahead. Thursday is the big day with reports form Dell, Costco, Heinz, Marvell and Sears. On Friday, Tiffany's reports.
Exxon holds its annual meeting Wednesday, and Bear Stearns' meeting is Thursday.
The Wall Street Journal's "D Conference - All Things Digital" runs Tuesday through Thursday in Carlsbad, Calif. and the ASCO conference starts next weekend.