Investing Club: Here's why investors are so worried about oil prices — and what you can do about it

Published Fri, Mar 11 20224:04 PM ESTUpdated Thu, Mar 24 20229:46 AM EDT

The major averages pulled back again this week as the Russia-Ukraine conflict waged on. Oil prices held stayed above the $100 per barrel level — a key economic reading pointed to ongoing inflation – though it was largely in line with expectations. With earnings season now behind us, the focus on macroeconomic and geopolitical updates will only be more front and center. When that happens it can prove difficult to focus on individual company fundamentals. That's why we provided an earnings rundown on all our holdings to help members operate without emotion. Moreover, we will be monitoring company specific and industry wide conferences in hopes of gaining more real-time information than is provided by macroeconomic reports, which are inherently backward looking. Given the move in oil, we want to take a moment to review some of the dynamics at play and why it is causing so much concern — not only on Wall Street but on Main Street as well. For starters, there is the simple fact that energy — be it gas or oil — is a key input for just about everything we consume. As a result, companies are forced to either push all or some of that cost through to customers or eat the cost at the expense of profit margins. While some industries are more directly impacted than others, the ripple effects of higher oil eventually hit every sector of the economy. While some costs can successfully be passed through, eventually, the high prices lead to what's known as demand destruction — or the reduction of demand for oil and oil-derived products. While the silver lining is that a little demand destruction can help stem the rise in prices by bringing supply and demand more into balance — thus the saying, "the cure for high prices is high prices" — it also means that economic growth will slow. This, in turn, leads to fears of a potential recession. That's not our call by any means but don't be surprised if you hear the "R" word thrown around a bit more these days — especially by the bears that are finally getting their moment after years of calling for doomsdays that never came — should energy prices remain elevated or worse, continue to climb. Second: there is the dynamic of what higher energy costs do to consumer spending. As energy demand at the consumer level is largely inelastic, when those costs rise, be it to fill up the tank or heat your house, it takes up a greater portion of disposable income. The results in less money available for the more elastic purchases, such as purchases of clothing or family outings. This means we should expect some pressure on these sectors should energy take up a larger and larger portion of disposable income. The caveat this time around, and something that is certainly working to the economy's advantage, is that the consumer is actually in pretty good shape. In fact, Morgan Stanley recently released a brief report commenting "that rising incomes, record levels of household wealth and healthy personal balance sheets could drive a consumer spending boom that powers stocks for years to come." So what's the takeaway? The elevated cost of energy is problematic and something we must continue to monitor closely. However, earnings season was solid, the consumer is strong and as a result we have some capacity to absorb the costs before becoming too negative on the real economy. Moreover, with the S & P 500 index in correction territory, the Dow Jones nearing that level and the Nasdaq playing in bear market territory, it's too late to be so negative on the entire market. Everyone is clearly fearful, so this is time to be (selectively) greedy. There are names that must be avoided at al costs, such as companies trading on a sales multiple basis. But the market declines weighed against the resilient consumer means that there are indeed bargains in this market. As we've stated since the end of last year, we are intensely focused on valuations as we seek out opportunities in the stocks of companies that do things, make stuff and generate real earnings. (See here for a full list of the stocks in Jim Cramer's Charitable Trust.) As a subscriber to the CNBC Investing Club with Jim Cramer, you will receive a trade alert before Jim makes a trade. Jim waits 45 minutes after sending a trade alert before buying or selling a stock in his charitable trust's portfolio. If Jim has talked about a stock on CNBC TV, he waits 72 hours after issuing the trade alert before executing the trade. THE ABOVE INVESTING CLUB INFORMATION IS SUBJECT TO OUR TERMS AND CONDITIONS AND PRIVACY POLICY , TOGETHER WITH OUR DISCLAIMER . NO FIDUCIARY OBLIGATION OR DUTY EXISTS, OR IS CREATED, BY VIRTUE OF YOUR RECEIPT OF ANY INFORMATION PROVIDED IN CONNECTION WITH THE INVESTING CLUB. NO SPECIFIC OUTCOME OR PROFIT IS GUARANTEED.

A general view of oil tanks in the Transneft-Kozmino Port near the far eastern town of Nakhodka, Russia.

Yuri Maltsev | Reuters