What to Watch: Macro Movers

The first half of the year had surprises for just about everyone. The stock market was weak, corporate profits were better than expected, oil remained robust, job growth was anemic, long interest rates continued to perplex.

What might the second half of 2005 hold in store for investors? Barring some new unforeseen crisis, these issues will continue to drive the economy as well as the financial markets.

Energy and Oil

Crude hit a record in the last week of June, closing (briefly) over $60 a barrel. Back when it was under $40, most economists would have told you that $60 oil would grind global growth to a halt. While there's little doubt that oil is having an impact, it's been more far muted than many had expected.

From a market perspective, the influence has been more pronounced. Trying to correlate the day-to-day gyrations of equity prices with crude has been a fool's errand. But consider the first four months of the year: Crude busted out over $50 in February, and has (mostly) been higher ever since; it's not hard to imagine that the stock market's lousy first half was somehow related.

Yet the relationship between oil prices and the market is far more complex than many realize. Since October 2002, oil has more than doubled in price -- and yet so has the Nasdaq Composite. Where's the inverse correlation so many seem so fond of blaming the market's woes upon?

Recently, I was asked where would the Nasdaq be if oil were still at $25 a barrel? My answer: "probably a lot lower." Why? Many of the same factors that have driven oil higher also have been driving the Nasdaq upwards, including massive government stimulation, ultra-low interest rates and increasing globalization.

But it won't always be that way. So far, the cumulative impact has been somewhat subdued. The impact won't always be this muted. The interrelationship between energy and global growth is nonlinear. There is a tipping point at which oil prices will have more bite, grinding the global economy to a halt. We just haven't hit that level yet.